Inherited IRAs in special needs trusts and SSI

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JBTX
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Inherited IRAs in special needs trusts and SSI

Post by JBTX »

UPDATE EDIT 7/8/2024: See updated questions later in the thread.

Original Post:


This is kind of a specialized question so not sure of the level of experience here, but I’ll give it a try.

I’m kind of confused about the concept of countable income as it relates to SSI /Medicaid eligibility for a special needs adult. I think I understand the countable assets but less so the countable income.

Assume:

- There is a 3rd party special needs trust set up, funded with $1 million
- the only assets starting out is an inherited Ira - traditional (no Roth)
- assume beneficiary is an EDB as disabled and qualifies for lifetime stretch of IRA distributions.
- for simplicity let’s say a $50k per year IRA distribution is done. This covers RMD and also covers beneficiaries expenses
- the $50k is distributed from the IRA, and from the trust, and again is used for expenses
- the $50k will count as $50k of income for income tax purposes to the beneficiary (as opposed to being retained in the accumulation trust and taxed at higher trust tax rates)


Is the $50k itself, as a distribution considered countable income that would disqualify from SSI? I would assume not assuming it is used for expenses of beneficiary.

Is the $50k counted, because it is part of taxable income, included as countable income?

How do the answers above change if the IRA is all Roth?
Last edited by JBTX on Mon Jul 08, 2024 7:08 pm, edited 3 times in total.
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typical.investor
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Re: IRAs in special needs trusts and SSI

Post by typical.investor »

JBTX wrote: Tue Nov 01, 2022 12:06 am This is kind of a specialized question so not sure of the level of experience here, but I’ll give it a try.

I’m kind of confused about the concept of countable income as it relates to SSI /Medicaid eligibility for a special needs adult. I think I understand the countable assets but less so the countable income.

Assume:

- There is a 3rd party special needs trust set up, funded with $1 million
- the only assets starting out is an inherited Ira - traditional (no Roth)
- assume beneficiary is an EDB as disabled and qualifies for lifetime stretch of IRA distributions.
- for simplicity let’s say a $50k per year IRA distribution is done. This covers RMD and also covers beneficiaries expenses
- the $50k is distributed from the IRA, and from the trust, and again is used for expenses
- the $50k will count as $50k of income for income tax purposes to the beneficiary (as opposed to being retained in the accumulation trust and taxed at higher trust tax rates)
Ok.
JBTX wrote: Tue Nov 01, 2022 12:06 am Is the $50k itself, as a distribution considered countable income that would disqualify from SSI? I would assume not assuming it is used for expenses of beneficiary.
I would say maybe. If given as cash yes. If used for food or shelter, then SSI may be reduced (by up to 1/3 I believe).
JBTX wrote: Tue Nov 01, 2022 12:06 am Is the $50k counted, because it is part of taxable income, included as countable income?
How is this question different than the previous one?

I would suggest the answer is no. Just because the distribution is taxable by the IRS, that doesn't make it countable income.
JBTX wrote: Tue Nov 01, 2022 12:06 am How do the answers above change if the IRA is all Roth?
I don't see that a distribution being from a Roth would affect whether the income is countable for SSI purposes. Again, if given as cash or an equivalent, then it would be countable income. If used for food or rent, then SSI could be reduced.

However, if it is a Roth, then obviously it would not be taxable income.

See https://secure.ssa.gov/poms.nsf/lnx/0501120200#e1a
a. Disbursements that are income
Cash paid directly from the trust to the individual is unearned income.

Disbursements from the trust to third parties that result in the trust beneficiary’s receiving non-cash items (other than food or shelter) are in-kind income if the items would not be partially or totally excluded non-liquid resources if retained into the month after the month of receipt.

For example, if a trust buys a car for the trust beneficiary and the trust beneficiary's spouse already has an excluded car for SSI purposes, the disbursement to purchase the second car is income in the month of receipt since it would not be an excluded resource in the following month.

For receipt of certain noncash items, see SI 00815.550. For a list of resource exclusions, see SI 01110.210.

b. Disbursements that result in receipt of in-kind support and maintenance
Food or shelter received by the trust beneficiary as a result of disbursements from the trust to a third party is income in the form of in-kind support and maintenance (ISM) and is valued under the presumed maximum value (PMV) rule. For instructions pertaining to the PMV rule, see SI 00835.300. For rules pertaining to a home, see SI 01120.200F. in this section.

c. Disbursements that are not income
Generally, disbursements from the trust to a third party are not income to the trust beneficiary, unless otherwise stated in SI 01120.200E.1.a. and SI 01120.200E.1.b. in this section. Disbursements that do not count as income may include those made for educational expenses, therapy, transportation, professional fees, medical services not covered by Medicaid, phone bills, recreation, and entertainment. This list is illustrative and does not limit the types of distributions that a trust may permit. For bills paid by a third party, see SI 00815.400.

Disbursements made from the trust to a third party that result in the trust beneficiary’s receiving non-cash items (other than food or shelter) are not income if those items would become a totally or partially excluded non-liquid resource if retained into the month after the month of receipt. For example, if a trust purchases a computer for the trust beneficiary, the computer is not income, since we would exclude the computer from resources as a household good in the following month. For resource treatment of household goods, personal effects, and other personal property, see SI 01130.430. For receipt of certain non-cash items, see SI 00815.550. For a list of resource exclusions, see SI 01110.210.
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beyou
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Re: IRAs in special needs trusts and SSI

Post by beyou »

I have been reading about this to figure out what types of accounts to leave to a SNT as well.

My reading leads to same response you got above.
Countable income is NOT same as taxable income.
It is encouraged foe trustee to track all taxable income and distribute all if possible to the beneficiary, to get it taxed at bemeficiary rate, as you said. But it is only countable income 100% if given as cash/deposit to their accounts. If given in form of paying bills, then it depends on what those bills are for. For food/certain housing expenses then yes one can lose 1/3 of SSI payments due to the food/rent/utilities payments. If used for most other expenses (medical bills not covered by medicaid, education, transportation etc) then no countable income at all.

Given housing and food are the largest expenses, far larger than what anyone typically is paid for SSI, this is a joke but I have accepted that losing 1/3 of benefit is a small price to pay to keep Medicaid. If you fully lose SSI, one could lose Medicaid too, and having good medical insurance is critical.


Also note this is a month to month issue. One can be reduced to zero benefits (if given cash) but assuming this is a mistake, one can stop and regain benefits a subsequent month. And if beneficiary expenses are low, the trust can retain the income and pay extra tax, better than losing Medicaid.
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Kenkat
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Re: IRAs in special needs trusts and SSI

Post by Kenkat »

I agree with typical.investor and beyou that your likely scenario is to get a 1/3 reduction of SSI due to the additional support rule, but maintain eligibility for Medicaid and SSI. It’s something, and as mentioned, medical benefits are key.

The other thing I will add from a longer term planning perspective is that if the SSI recipient is considered to have been disabled before age 22, which is not uncommon when talking about special needs trusts, a long term goal is to get the disabled person on SSDI once parents begin taking social security. The disabled person will qualify for Medicare as well as typically a higher SSDI benefit as it is based on the parent’s record.
humblecoder
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Re: IRAs in special needs trusts and SSI

Post by humblecoder »

beyou wrote: Tue Nov 01, 2022 5:56 pm I have been reading about this to figure out what types of accounts to leave to a SNT as well.

My reading leads to same response you got above.
Countable income is NOT same as taxable income.
It is encouraged foe trustee to track all taxable income and distribute all if possible to the beneficiary, to get it taxed at bemeficiary rate, as you said. But it is only countable income 100% if given as cash/deposit to their accounts. If given in form of paying bills, then it depends on what those bills are for. For food/certain housing expenses then yes one can lose 1/3 of SSI payments due to the food/rent/utilities payments. If used for most other expenses (medical bills not covered by medicaid, education, transportation etc) then no countable income at all.

Given housing and food are the largest expenses, far larger than what anyone typically is paid for SSI, this is a joke but I have accepted that losing 1/3 of benefit is a small price to pay to keep Medicaid. If you fully lose SSI, one could lose Medicaid too, and having good medical insurance is critical.


Also note this is a month to month issue. One can be reduced to zero benefits (if given cash) but assuming this is a mistake, one can stop and regain benefits a subsequent month. And if beneficiary expenses are low, the trust can retain the income and pay extra tax, better than losing Medicaid.
I agree with your sentiments there. Another option is to use money from an ABLE account to pay the portion of food/shelter/etc that cannot be covered by SSI. This allows you to cover those expenses while not losing 1/3 of your SSI payment. The only caveat is that you cannot retain distributions for housing from month to month; it needs to be spent in the month the distribution is taken. Here is a reference to the SSA POMS on this topic: https://secure.ssa.gov/poms.nsf/lnx/0501130740

Note that Boglehead wiki appears to contradict the POMS, but I would consider the POMS to be the gold standard reference.

As always, do your own research and don't rely upon my layperson interpretation.
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beyou
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Re: IRAs in special needs trusts and SSI

Post by beyou »

humblecoder wrote: Tue Nov 01, 2022 10:42 pm
beyou wrote: Tue Nov 01, 2022 5:56 pm I have been reading about this to figure out what types of accounts to leave to a SNT as well.

My reading leads to same response you got above.
Countable income is NOT same as taxable income.
It is encouraged foe trustee to track all taxable income and distribute all if possible to the beneficiary, to get it taxed at bemeficiary rate, as you said. But it is only countable income 100% if given as cash/deposit to their accounts. If given in form of paying bills, then it depends on what those bills are for. For food/certain housing expenses then yes one can lose 1/3 of SSI payments due to the food/rent/utilities payments. If used for most other expenses (medical bills not covered by medicaid, education, transportation etc) then no countable income at all.

Given housing and food are the largest expenses, far larger than what anyone typically is paid for SSI, this is a joke but I have accepted that losing 1/3 of benefit is a small price to pay to keep Medicaid. If you fully lose SSI, one could lose Medicaid too, and having good medical insurance is critical.


Also note this is a month to month issue. One can be reduced to zero benefits (if given cash) but assuming this is a mistake, one can stop and regain benefits a subsequent month. And if beneficiary expenses are low, the trust can retain the income and pay extra tax, better than losing Medicaid.
I agree with your sentiments there. Another option is to use money from an ABLE account to pay the portion of food/shelter/etc that cannot be covered by SSI. This allows you to cover those expenses while not losing 1/3 of your SSI payment. The only caveat is that you cannot retain distributions for housing from month to month; it needs to be spent in the month the distribution is taken. Here is a reference to the SSA POMS on this topic: https://secure.ssa.gov/poms.nsf/lnx/0501130740

Note that Boglehead wiki appears to contradict the POMS, but I would consider the POMS to be the gold standard reference.

As always, do your own research and don't rely upon my layperson interpretation.
Yes ABLE seems a good option for some.
I have not seriously considered opening one for my son.
Problems are

1) his condition gives him minimal interest/ability in managing his own finances, both paying bills and keeping receipts to prove expenses are qualified. part of reason for SNT is not just financial but also getting someone to help in your absence.

2) Given one can only keep up to $100k before losing SSI, ABLE is more of a checking acct if the disabled is working making some income, a place to save some $ without breaking the $2000 asset limit. Gifts can be given to ABLE but again, $15-16k/year and can’t let it grow too much.

3) Actual cost of living in most urban areas means practically that you either must move somewhere dirt cheap or accept SNT paying housing and/or food to live a decent standard of living. At $15k per year in Able, with max $100k, I could only fund so many years of living expenses before defeating the purpose of ABLE.

As usual, most govt programs are impractical when it comes to actual real world issue. At least SSI is getting an inflation based increase, but the asset limits (both personal and ABLE) need to be revised to reality. And the need to be under 26 for ABLE (when declared disabled) also needs to be fixed. One can become disabled at any age…. But you can help your child within the constraints to some extent. They make you jump through hoops though, for minimal benefits.
Ctf
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Re: IRAs in special needs trusts and SSI

Post by Ctf »

I came across your post in trying to find more information about the best assets to leave to a snt, especially with regard to taxes for the snt. Did you ever find out how things are affected by having a roth ira vs traditional ira with the snt as beneficiary?

Also just some comments about ABLE accounts- I agree some of the limitations make one wonder if it's worth the hassle- but the account can be managed by an Authorized Legal Representative if needed. Also, this legislation passed possibly after your post, some progress being made, (you may already be aware of the following but if it's helpful to someone):

"In 2022, the U.S. Congress passed the ABLE Age Adjustment Act. This legislation increases the eligibility age of beneficiaries of ABLE accounts from the onset of disability before age 26 to age 46—beginning January 1, 2026."

The annual contribution limit increases annually with the gift-tax exclusion so that also helps some ($18000 in 2024, plus additional can be contributed from earned income in certain circumstances-don't have that exact $ amount ~$14000 this year I think).

Within the ABLE money can be invested and earnings are tax-free, so a portion of the account can be invested like a Roth IRA with space left for routine deposits into the ABLE from the SNT (or anyone) to pay for QDEs. ABLEs can be a good complement to a SNT. Even if you don't want to actually save much in the ABLE, by at least having one set up- the SNT (or another family member) can then pass the funds necessary to supplement the SSI used on rent/utilities/food through the ABLE each month. As long as these types of qualifying expenses are then paid from the ABLE, there is no loss of 1/3 of SSI- because the SSI+ABLE "paid" for the rent/utilities/food, not the SNT or the family member. Each time the SNT/anyone contributes to the ABLE it will count toward the annual limit, but this method allows for a bigger housing/util/food budget without losing 1/3 of ssi (full ssi+$1500/mo paid from the SNT to ABLE-based on the $18k annual limit 2024.). Below is information I received from a Special Needs Advocate:

" What constitutes a “qualified disability expense?” QDEs must relate to
the beneficiary’s disability. They include, w/o limitation: education;
housing;* transportation; employment training and support; assistive
technology and related services; personal support services; health;
prevention and wellness; financial management and administrative
services; legal fees; expenses for ABLE account oversight and
monitoring; funeral and burial; and basic living expenses. *Funds from
the ABLE account used to pay for housing for an SSI recipient must be
spent within the same calendar month that funds are withdrawn. (See
POMS SI 01130.740.)"

• Contributions to an ABLE account may be made by an SNT. ...An SNT
cannot give cash to an SSI recipient w/o affecting the SSI, but an ABLE
account owner can have a debit card. If an SNT contributes cash to an
ABLE account, this allows that cash to be given to the SSI beneficiary.

• If someone (or the SNT) pays $1,000 rent for an SSI recipient, that counts as in-kind
support (ISM) and, generally, reduces the SSI by ~$300 for that month.
But if the same person/SNT contributes the cash to an ABLE account, and if
that amount is used for rent, there is no ISM.
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JBTX
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Re: IRAs in special needs trusts and SSI

Post by JBTX »

Proof I’m getting old - I started a new thread which I had previously asked a year or so ago.

Here are my questions - some of which are similar to my OP questions. I guess I was not 100% confident that I got an answer, or understood it.


Let’s say a disabled young adult, on SSI, and eventually SSDI DAC, inherits $500k into a third party SNT (from someone other than a parent). Assume adult child is around 30 years old, and qualifies as EDB (eligible designated beneficiary - which gets lifetime stretch)


Upon inheriting the IRA, in the SNT trust, it appears the initial RMDs for lifetime stretch would be around $9,000 per year.

If each year that $9000 RMD was distributed out of the SNT, it is taxable to adult child, but there should be little or no income tax, as the child would likely only get SSI or SSDI DAC plus the $9000 rmd.

My questions are:

Would that $9000 in RMD income affect the adult child’s SSI or Medicaid eligibility, or eventually SSDI DAC? In other words there are income limits to receiving SSI - would RMD income go against those income limits?

For SSI presumably the money would need to be spent to stay under $2000 asset limit. What can the money be spent on? I don’t think it can be spent on food or shelter, correct?

Could the $9000, or some portion of it, be moved into an ABLE account?

I assume the money could be left in the trust (accumulation trust) but it would be taxed at trust tax rates.

If instead say I were the primary beneficiary of the IRA, but the SNT was the contingent beneficiary. Could I disclaim it and then it goes to the SNT?

Summary - from other posts above it seems like the consensus is if the distribution is used to pay for things that are not food and shelter, and the distribution is not cash, the fact that the distribution is taxable income does not make it countable income.

If true - how does one make an IRA RMD distribution from a trust, and use it for a non food shelter expense, and not become cash in the interim? I don’t have any experience adminstering trusts.
humblecoder
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Re: IRAs in special needs trusts and SSI

Post by humblecoder »

I am not a accountant, tax attorney or other tax professional.
JBTX wrote: Mon Jul 08, 2024 5:39 pm
My questions are:

Would that $9000 in RMD income affect the adult child’s SSI or Medicaid eligibility, or eventually SSDI DAC? In other words there are income limits to receiving SSI - would RMD income go against those income limits?
It depends on what the money is used for.

Based upon my own understanding, if the money is distributed as cash or cash-equivalent (ex: gift card) directly to the beneficiary, this counts against the SSI income limits.

If the money is used to pay for food or shelter on the beneficiary's behalf, that wouldn't count against the income limit, but it would be reduce their SSI benefit by up to 1/3. SSI is reduced by up to 1/3 if someone else is helping to pay for the beneficiary's food/shelter. In the case, the "someone else" would be the SNT.

If the money is used to pay for items other than food/shelter, then this would not count against the SSI income limit.

In all cases, though, it would count as income as far as IRS reporting goes.

References:
https://www.specialneedsalliance.org/th ... bit-cards/
https://specialneedsanswers.com/what-ca ... fits-14931
JBTX wrote: Mon Jul 08, 2024 5:39 pm For SSI presumably the money would need to be spent to stay under $2000 asset limit. What can the money be spent on? I don’t think it can be spent on food or shelter, correct?
SNT money can be spent on anything that benefits the beneficiary. However, it cannot be used to pay for food or shelter without reducing their SSI benefit by 1/3.
JBTX wrote: Mon Jul 08, 2024 5:39 pm Could the $9000, or some portion of it, be moved into an ABLE account?
My understand is that the answer is yes, up to the contribution limit.

References:
https://www.ablenow.com/blog/articles/c ... h-ablenow/
JBTX wrote: Mon Jul 08, 2024 5:39 pm I assume the money could be left in the trust (accumulation trust) but it would be taxed at trust tax rates.
Assuming you are referring to a Traditional IRA, yes. Obviously, with a Roth IRA, no taxes would be owed as this is not considered to be income. That would be the advantage of having the SNT inherit a Roth IRA, rather than a Traditional IRA
JBTX wrote: Mon Jul 08, 2024 5:39 pm If instead say I were the primary beneficiary of the IRA, but the SNT was the contingent beneficiary. Could I disclaim it and then it goes to the SNT?
My understanding is yes. If the primary beneficiary were to disclaim the IRA, then it would go to the contingent beneficiaries.
JBTX wrote: Mon Jul 08, 2024 5:39 pm Summary - from other posts above it seems like the consensus is if the distribution is used to pay for things that are not food and shelter, and the distribution is not cash, the fact that the distribution is taxable income does not make it countable income.
That is my understanding as well.
JBTX wrote: Mon Jul 08, 2024 5:39 pm If true - how does one make an IRA RMD distribution from a trust, and use it for a non food shelter expense, and not become cash in the interim? I don’t have any experience adminstering trusts.
Presumably, you could have the trust pay for the expense directly. Many (most?) trust accounts provide a debit card that you could use. I imagine you could also pay for the expense yourself and then reimburse yourself from the trust.

Again, I am not a lawyer or accountant or tax professional. While I did my best to provide my layperson understanding, if you are unfamiliar with the roles and responsibilities as trustee of a SNT, I would suggest consulting with an attorney who specializes in special needs planned specifically. Mistakes in this area could really be damaging so this is one area where the normal Bogleheads DIY mentality may not be appropriate.
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JBTX
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Re: IRAs in special needs trusts and SSI

Post by JBTX »

humblecoder wrote: Mon Jul 08, 2024 8:10 pm I am not a accountant, tax attorney or other tax professional.
JBTX wrote: Mon Jul 08, 2024 5:39 pm
My questions are:

Would that $9000 in RMD income affect the adult child’s SSI or Medicaid eligibility, or eventually SSDI DAC? In other words there are income limits to receiving SSI - would RMD income go against those income limits?
It depends on what the money is used for.

Based upon my own understanding, if the money is distributed as cash or cash-equivalent (ex: gift card) directly to the beneficiary, this counts against the SSI income limits.

If the money is used to pay for food or shelter on the beneficiary's behalf, that wouldn't count against the income limit, but it would be reduce their SSI benefit by up to 1/3. SSI is reduced by up to 1/3 if someone else is helping to pay for the beneficiary's food/shelter. In the case, the "someone else" would be the SNT.

If the money is used to pay for items other than food/shelter, then this would not count against the SSI income limit.

In all cases, though, it would count as income as far as IRS reporting goes.

References:
https://www.specialneedsalliance.org/th ... bit-cards/
https://specialneedsanswers.com/what-ca ... fits-14931
JBTX wrote: Mon Jul 08, 2024 5:39 pm For SSI presumably the money would need to be spent to stay under $2000 asset limit. What can the money be spent on? I don’t think it can be spent on food or shelter, correct?
SNT money can be spent on anything that benefits the beneficiary. However, it cannot be used to pay for food or shelter without reducing their SSI benefit by 1/3.
JBTX wrote: Mon Jul 08, 2024 5:39 pm Could the $9000, or some portion of it, be moved into an ABLE account?
My understand is that the answer is yes, up to the contribution limit.

References:
https://www.ablenow.com/blog/articles/c ... h-ablenow/
JBTX wrote: Mon Jul 08, 2024 5:39 pm I assume the money could be left in the trust (accumulation trust) but it would be taxed at trust tax rates.
Assuming you are referring to a Traditional IRA, yes. Obviously, with a Roth IRA, no taxes would be owed as this is not considered to be income. That would be the advantage of having the SNT inherit a Roth IRA, rather than a Traditional IRA
JBTX wrote: Mon Jul 08, 2024 5:39 pm If instead say I were the primary beneficiary of the IRA, but the SNT was the contingent beneficiary. Could I disclaim it and then it goes to the SNT?
My understanding is yes. If the primary beneficiary were to disclaim the IRA, then it would go to the contingent beneficiaries.
JBTX wrote: Mon Jul 08, 2024 5:39 pm Summary - from other posts above it seems like the consensus is if the distribution is used to pay for things that are not food and shelter, and the distribution is not cash, the fact that the distribution is taxable income does not make it countable income.
That is my understanding as well.
JBTX wrote: Mon Jul 08, 2024 5:39 pm If true - how does one make an IRA RMD distribution from a trust, and use it for a non food shelter expense, and not become cash in the interim? I don’t have any experience adminstering trusts.
Presumably, you could have the trust pay for the expense directly. Many (most?) trust accounts provide a debit card that you could use. I imagine you could also pay for the expense yourself and then reimburse yourself from the trust.

Again, I am not a lawyer or accountant or tax professional. While I did my best to provide my layperson understanding, if you are unfamiliar with the roles and responsibilities as trustee of a SNT, I would suggest consulting with an attorney who specializes in special needs planned specifically. Mistakes in this area could really be damaging so this is one area where the normal Bogleheads DIY mentality may not be appropriate.
Thanks for weighing in again. It sounds like we are on the same wave length.

Yes Roth would be more flexible but in this case the inherited IRA will be traditional and there is no chance that it will be Roth converted.

At this point there is no trust and one would have to be created. I’m just kicking the tires in this because if my understanding is correct it could save 6 figures in taxes. But I want to be confident before I suggest going this route.
johnra
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Re: Inherited IRAs in special needs trusts and SSI

Post by johnra »

(1) It became a lot easier once I started my own Social Security--my disabled adult child (DAC) daughter gained SSDI and also became Medicare eligible (after 2 years). Since her SSDI is a lot more than SSI was, she lost the SSI. This makes things a lot easier because we no longer have to worry about the monthly limits and $2000 maximum assets. In losing SSI, she did not lose Medicaid (MediCal) and all the related benefits due to the "Pass Along Rule and the Pickle Amendment." Now she has SSDI, Medicare, MediCal and regional services.

(2) I plan on making her SNT the beneficiary of her share of my traditional IRA to take advantage of her EDB status and life long stretch. If she needs the funding (eg housing), then RMDs will pay out from the trust for this at her individual tax rate, and no need to worry about needs-based eligibility programs. If RMDs are not needed, then it will accumulate in the trust at high taxes, but I will rest in my grave assured that her financial needs are pretty secure. At the end of her life, the remainder will go to charity (½) and her siblings (½)

(3) I don't plan on using my Roth IRA for the SNT so that my other children can take its advantage.

(4) She has an ABLE account at Fideltiy with about $30K which is next to a CMA account which receives her SSDI that pays for her group home. The CMA has a debit card but we are not really sure what to do with the money, but it's there and invested while we figure it out.

(5) A big part of planning for her lifelong security are related to conservatorship--that is another complicated discussion.
startabatha
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

johnra wrote: Tue Jul 09, 2024 2:28 am (1) It became a lot easier once I started my own Social Security--my disabled adult child (DAC) daughter gained SSDI and also became Medicare eligible (after 2 years). Since her SSDI is a lot more than SSI was, she lost the SSI. This makes things a lot easier because we no longer have to worry about the monthly limits and $2000 maximum assets. In losing SSI, she did not lose Medicaid (MediCal) and all the related benefits due to the "Pass Along Rule and the Pickle Amendment." Now she has SSDI, Medicare, MediCal and regional services.

(2) I plan on making her SNT the beneficiary of her share of my traditional IRA to take advantage of her EDB status and life long stretch. If she needs the funding (eg housing), then RMDs will pay out from the trust for this at her individual tax rate, and no need to worry about needs-based eligibility programs. If RMDs are not needed, then it will accumulate in the trust at high taxes, but I will rest in my grave assured that her financial needs are pretty secure. At the end of her life, the remainder will go to charity (½) and her siblings (½)

(3) I don't plan on using my Roth IRA for the SNT so that my other children can take its advantage.

(4) She has an ABLE account at Fideltiy with about $30K which is next to a CMA account which receives her SSDI that pays for her group home. The CMA has a debit card but we are not really sure what to do with the money, but it's there and invested while we figure it out.

(5) A big part of planning for her lifelong security are related to conservatorship--that is another complicated discussion.
I believe that California has different rules regarding Medicaid asset limits. In most states Medicaid still has a hard $2,000 asset limit and depending on the type of Medicaid, there is also a monthly income limit (typically 300% of max SSI amount) but what is counted as "income" by Medicaid is highly dependent on the type of Medicaid the person has. Most but not all types of Medicaid will also apply a penalty or 'deem as income' third party distributions for food and shelter but again it highly depends on the type of Medicaid and the state. DAC Medicaid has the best protections against this deeming in my experience. A Medicaid advocate or an attorney highly knowledgable in all facets of your state Medicaid law would be a good resource.
startabatha
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Re: IRAs in special needs trusts and SSI

Post by startabatha »

JBTX wrote: Mon Jul 08, 2024 5:39 pm
My questions are:

Would that $9000 in RMD income affect the adult child’s SSI or Medicaid eligibility, or eventually SSDI DAC? In other words there are income limits to receiving SSI - would RMD income go against those income limits?
(I'll try my hand at this with the caveat that I'm not an attorney or an accountant, just a parent that reads a lot on disability program rules).

It all depends how that income is distributed. If cash to the beneficiary, or for food and shelter then they may very well count as income to the beneficiary according to the means tested public benefit agency. However, as of Sept. 2024, food is going away as being deemed in-kind support and maintenance (ISM). Hooray for that!
JBTX wrote: Mon Jul 08, 2024 5:39 pm For SSI presumably the money would need to be spent to stay under $2000 asset limit. What can the money be spent on? I don’t think it can be spent on food or shelter, correct?
If the bills are paid directly to third party vendors, then there should be no penalty presuming they are allowable trust expenses. However if they are used for food (soon to be eliminated as ISM as posted above) or shelter, SSA will apply a maximum 1/3 presumed value reduction to the beneficiary’s SSI. Food and shelter distributions may or may not be counted as income by Medicaid, it highly depends on the *type* of state Medicaid they are on, there are a myriad of programs wach with different eligibilitu rules. It is assumed that Medicaid will take SSA's stance on food no longer being counted as ISM but there has been nothing yet I've read on that.
JBTX wrote: Mon Jul 08, 2024 5:39 pm Could the $9000, or some portion of it, be moved into an ABLE account?
Yes, subject to the ABLE annual contribution limit from all sources.
JBTX wrote: Mon Jul 08, 2024 5:39 pm I assume the money could be left in the trust (accumulation trust) but it would be taxed at trust tax rates.
Correct. Unless it is a Roth RMD, which is not taxed. More reason to convert to Roth.

JBTX wrote: Mon Jul 08, 2024 5:39 pm
If instead say I were the primary beneficiary of the IRA, but the SNT was the contingent beneficiary. Could I disclaim it and then it goes to the SNT?
No idea, but seems plausible.
JBTX wrote: Mon Jul 08, 2024 5:39 pm
Summary - from other posts above it seems like the consensus is if the distribution is used to pay for things that are not food and shelter, and the distribution is not cash, the fact that the distribution is taxable income does not make it countable income.
Yes, with the additional criteria that most special needs trusts require that distributions must be for the "exclusive benefit" of the beneficiary and that distributions cannot be used for items that can be easily by converted to cash or transferred to others, like most gift cards. I'm not sure how rigorous means tested public agencies are in auditing such distributions, but caution is warranted here.
JBTX wrote: Mon Jul 08, 2024 5:39 pm
If true - how does one make an IRA RMD distribution from a trust, and use it for a non food shelter expense, and not become cash in the interim? I don’t have any experience adminstering trusts.
Options I know of: 1. By direct payment of goods and services to the vendor. 2. By transferring 3SNT funds to the beneficiary’s ABLE account (up to the annual maximum contribution limit from ALL sources including the beneficiary's contributios, for example excess wages that puts them over $2,000 a month asset limit) and allowing the beneficiary to access those funds via ABLE debit card or transfer to their personal checking account, subject to keeping that personal checking account below $2,000. 3. (My favorite) By having the trustee pay off the beneficiary 's credit card (credit card debt is not supposed to count as income or an asset by means-tested public agencies). 4. By providing the beneficiary a preloaded True Link or similar preloaded debit card *which I assume is also subject to the overall $2,000 asset limit). 5. By the trust reimbursing the trustee allowable trust expenses they've paid on behalf of the beneficiary.
Last edited by startabatha on Tue Jul 09, 2024 11:44 am, edited 1 time in total.
Topic Author
JBTX
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Re: Inherited IRAs in special needs trusts and SSI

Post by JBTX »

johnra wrote: Tue Jul 09, 2024 2:28 am (1) It became a lot easier once I started my own Social Security--my disabled adult child (DAC) daughter gained SSDI and also became Medicare eligible (after 2 years). Since her SSDI is a lot more than SSI was, she lost the SSI. This makes things a lot easier because we no longer have to worry about the monthly limits and $2000 maximum assets. In losing SSI, she did not lose Medicaid (MediCal) and all the related benefits due to the "Pass Along Rule and the Pickle Amendment." Now she has SSDI, Medicare, MediCal and regional services.

(2) I plan on making her SNT the beneficiary of her share of my traditional IRA to take advantage of her EDB status and life long stretch. If she needs the funding (eg housing), then RMDs will pay out from the trust for this at her individual tax rate, and no need to worry about needs-based eligibility programs. If RMDs are not needed, then it will accumulate in the trust at high taxes, but I will rest in my grave assured that her financial needs are pretty secure. At the end of her life, the remainder will go to charity (½) and her siblings (½)

(3) I don't plan on using my Roth IRA for the SNT so that my other children can take its advantage.

(4) She has an ABLE account at Fideltiy with about $30K which is next to a CMA account which receives her SSDI that pays for her group home. The CMA has a debit card but we are not really sure what to do with the money, but it's there and invested while we figure it out.

(5) A big part of planning for her lifelong security are related to conservatorship--that is another complicated discussion.
startabatha wrote: Tue Jul 09, 2024 10:22 am
JBTX wrote: Mon Jul 08, 2024 5:39 pm
My questions are:

Would that $9000 in RMD income affect the adult child’s SSI or Medicaid eligibility, or eventually SSDI DAC? In other words there are income limits to receiving SSI - would RMD income go against those income limits?
I'll try my hand at this, caveat. I'm not an attorney or an accountant, just a parent that reads a lot on disability program rules.

It all depends how that income is distributed. If cash to the beneficiary, or for food and shelter then they may very well count as income to the beneficiary according to the means tested public benefit agency. However, as of Sept. 2024, food is going away as being deemed in-kind support and maintenance (ISM). Hooray for that!
JBTX wrote: Mon Jul 08, 2024 5:39 pm For SSI presumably the money would need to be spent to stay under $2000 asset limit. What can the money be spent on? I don’t think it can be spent on food or shelter, correct?
If the bills are paid directly to third party vendors, then there should be no penalty presuming they are allowable trust expenses. However if they are used for food (soon to be eliminated as ISM as posted above) or shelter, SSA will apply a maximum 1/3 presumed value reduction to the beneficiary’s SSI. Food and shelter distributions may or may not be counted as income by Medicaid, it highly depends on the *type* of state Medicaid they are on, there are a myriad of programs wach with different eligibilitu rules. It is assumed that Medicaid will take SSA's stance on food no longer being counted as ISM but there has been nothing yet I've read on that.
JBTX wrote: Mon Jul 08, 2024 5:39 pm Could the $9000, or some portion of it, be moved into an ABLE account?
Yes, subject to the ABLE annual contribution limit from all sources.
JBTX wrote: Mon Jul 08, 2024 5:39 pm I assume the money could be left in the trust (accumulation trust) but it would be taxed at trust tax rates.
Correct. Unless it is a Roth RMD, which is not taxed. More reason to convert to Roth.

JBTX wrote: Mon Jul 08, 2024 5:39 pm
If instead say I were the primary beneficiary of the IRA, but the SNT was the contingent beneficiary. Could I disclaim it and then it goes to the SNT?
No idea, but seems plausible.
JBTX wrote: Mon Jul 08, 2024 5:39 pm
Summary - from other posts above it seems like the consensus is if the distribution is used to pay for things that are not food and shelter, and the distribution is not cash, the fact that the distribution is taxable income does not make it countable income.
Yes, with the additional criteria that most special needs trusts require that distributions must be for the "exclusive benefit" of the beneficiary and that distributions cannot be used for items that can be easily by converted to cash or transferred to others, like most gift cards. I'm not sure how rigorous means tested public agencies are in auditing such distributions, but caution is warranted here.
JBTX wrote: Mon Jul 08, 2024 5:39 pm
If true - how does one make an IRA RMD distribution from a trust, and use it for a non food shelter expense, and not become cash in the interim? I don’t have any experience adminstering trusts.
Options I know of: 1. By direct payment of goods and services to the vendor. 2. By transferring 3SNT funds to the beneficiary’s ABLE account (up to the annual maximum contribution limit from ALL sources including the beneficiary's contributios, for example excess wages that puts them over $2,000 a month asset limit) and allowing the beneficiary to access those funds via ABLE debit card or transfer to their personal checking account, subject to keeping that personal checking account below $2,000. 3. (My favorite) By having the trustee pay off the beneficiary 's credit card (credit card debt is not supposed to count as income or an asset by means-tested public agencies). 4. By providing the beneficiary a preloaded True Link or similar preloaded debit card *which I assume is also subject to the overall $2,000 asset limit). 5. By the trust reimbursing the trustee allowable trust expenses they've paid on behalf of the beneficiary.
Both of these are very helpful, thanks.

Where I am getting hung up is my lack of experience in actually doing RMDs and lack of experience administering a trust, and the mechanics surrounding those.

So if we have an inherited traditional IRA in an SNT, we will have to do an RMD, and we are distributing outside of the trust for lower taxes.

At the same time, we want to pay applicable expenses (excluding food and housing) directly from the trust. So what are the mechanics of this?

Perhaps there is a bank account in the trust, but not in the inherited IRA? Then the RMD is made to that bank account, and then expenses are paid out of that bank account?

I’m sure I’m in the weeds here but just trying to understand.
startabatha
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

Someone please correct me if I'm wrong but the way I once heard it that made sense to me is as follows:
"In the trust" means any asset titled in the name of the trust, be it a bank account, brokerage account, money market account, etc. A trust can be funded in many places. As many places as you'd put your own name on various accounts. So when RMD comes out of the IRA that was inherited by a 3SNT it can go to any account titled in the name of the trust. It just can't go back into the originating inherited IRA, right? It could even conceivably go directly to the beneficiary so long as the part of the RMD that exceeds means-tested income or assets limits are sheltered in an ABLE account up to the ABLE annual contribution limits from all sources. About as clear as mud, ha!
Topic Author
JBTX
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Re: Inherited IRAs in special needs trusts and SSI

Post by JBTX »

startabatha wrote: Tue Jul 09, 2024 11:58 am Someone please correct me if I'm wrong but the way I once heard it that made sense to me is as follows:
"In the trust" means any asset titled in the name of the trust, be it a bank account, brokerage account, money market account, etc. A trust can be funded in many places. As many places as you'd put your own name on various accounts. So when RMD comes out of the IRA that was inherited by a 3SNT it can go to any account titled in the name of the trust. It just can't go back into the originating inherited IRA, right? It could even conceivably go directly to the beneficiary so long as the part of the RMD that exceeds means-tested income or assets limits are sheltered in an ABLE account up to the ABLE annual contribution limits from all sources. About as clear as mud, ha!
That makes sense. I may end up opening a 3SNT for this particular purpose, which in theory could save significant rmd tax money due to EDB stretch and lower tax rate of our disabled son. However I want to make sure we don’t set up something that will spit out RMD money that we can’t utililize or redeploy. Right now he is living at home and his needs are modest. That could change if we were to opt for a private living situation (like Daymark living).

Eventually he will go to SSDI DAC. That could be in as little as just over a year if I filed early, or up to 8 years if I wait until 70. The calculators will generally say file at 62 due to the DAC payment plus child in care (the child in care would be cut in approx half due to family max). However as long as he is getting SSI and my wife is working I’m inclined to wait to increase my social security benefits.

Another potential complicating factor is I am applying, again, for SSI for our daughter (bipolar) other issues. She was rejected a few years ago and will probably be rejected again but I thought I’d try. If she were accepted that would get her SSI and Medicaid also which would be helpful. However whenenver I file for SS, both kids would go to DAC, but the total payment would not increase because we had already hit family max with son and child in care. That would be an even greater incentive for me to wait and increase my SS if both kids were getting SSI. Even if she were approved my expectation is eventually she will work enough such that she will no longer be eligible.

Another complicating factor, and this is definitely a “first world problem” type issue, is there could be even more inherited IRAs in the next 5-10 years. If those or part of those went to sons SNT, that could also save additional taxes, but at some point the distributions may become more than we can spend, which would disqualify benefits (or else leave in trust at trust tax rates). It could be enough however that the tax benefits would exceed the modest SSI benefits, which at that point may be worthwhile for me to file for SSI and do DAC.

So a lot of moving parts, and I am still learning. I’m coming around to your approach of having an 3SNT set up now for such scenarios as well as just becoming more familiar with the mechanics of maintaining one.

This stuff really can get complicated.
bsteiner
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Re: Inherited IRAs in special needs trusts and SSI

Post by bsteiner »

JBTX wrote: Tue Jul 09, 2024 1:00 pm
startabatha wrote: Tue Jul 09, 2024 11:58 am Someone please correct me if I'm wrong but the way I once heard it that made sense to me is as follows:
"In the trust" means any asset titled in the name of the trust, be it a bank account, brokerage account, money market account, etc. A trust can be funded in many places. As many places as you'd put your own name on various accounts. So when RMD comes out of the IRA that was inherited by a 3SNT it can go to any account titled in the name of the trust. It just can't go back into the originating inherited IRA, right? It could even conceivably go directly to the beneficiary so long as the part of the RMD that exceeds means-tested income or assets limits are sheltered in an ABLE account up to the ABLE annual contribution limits from all sources. About as clear as mud, ha!
That makes sense. I may end up opening a 3SNT for this particular purpose, which in theory could save significant rmd tax money due to EDB stretch and lower tax rate of our disabled son. However I want to make sure we don’t set up something that will spit out RMD money that we can’t utililize or redeploy. Right now he is living at home and his needs are modest. That could change if we were to opt for a private living situation (like Daymark living).

Eventually he will go to SSDI DAC. That could be in as little as just over a year if I filed early, or up to 8 years if I wait until 70. The calculators will generally say file at 62 due to the DAC payment plus child in care (the child in care would be cut in approx half due to family max). However as long as he is getting SSI and my wife is working I’m inclined to wait to increase my social security benefits.

Another potential complicating factor is I am applying, again, for SSI for our daughter (bipolar) other issues. She was rejected a few years ago and will probably be rejected again but I thought I’d try. If she were accepted that would get her SSI and Medicaid also which would be helpful. However whenenver I file for SS, both kids would go to DAC, but the total payment would not increase because we had already hit family max with son and child in care. That would be an even greater incentive for me to wait and increase my SS if both kids were getting SSI. Even if she were approved my expectation is eventually she will work enough such that she will no longer be eligible.

Another complicating factor, and this is definitely a “first world problem” type issue, is there could be even more inherited IRAs in the next 5-10 years. If those or part of those went to sons SNT, that could also save additional taxes, but at some point the distributions may become more than we can spend, which would disqualify benefits (or else leave in trust at trust tax rates). It could be enough however that the tax benefits would exceed the modest SSI benefits, which at that point may be worthwhile for me to file for SSI and do DAC.

So a lot of moving parts, and I am still learning. I’m coming around to your approach of having an 3SNT set up now for such scenarios as well as just becoming more familiar with the mechanics of maintaining one.

This stuff really can get complicated.
It doesn't matter whether the trust is in your Will or in a separate trust instrument. It's a matter of style rather than substance.

The trustees will be able to distribute or accumulate as much as they decide each year. They can consider income taxes and any other factors they think are relevant.

They can consult with a lawyer knowledgeable about Medicaid as to what distributions would or would not jeopardize Medicaid, though once the child gets Social Security disability benefits (actually two years after that) Medicaid will be less important.

SSI is small, though it gives you Medicaid.
Topic Author
JBTX
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Re: Inherited IRAs in special needs trusts and SSI

Post by JBTX »

bsteiner wrote: Tue Jul 09, 2024 1:21 pm
JBTX wrote: Tue Jul 09, 2024 1:00 pm
startabatha wrote: Tue Jul 09, 2024 11:58 am Someone please correct me if I'm wrong but the way I once heard it that made sense to me is as follows:
"In the trust" means any asset titled in the name of the trust, be it a bank account, brokerage account, money market account, etc. A trust can be funded in many places. As many places as you'd put your own name on various accounts. So when RMD comes out of the IRA that was inherited by a 3SNT it can go to any account titled in the name of the trust. It just can't go back into the originating inherited IRA, right? It could even conceivably go directly to the beneficiary so long as the part of the RMD that exceeds means-tested income or assets limits are sheltered in an ABLE account up to the ABLE annual contribution limits from all sources. About as clear as mud, ha!
That makes sense. I may end up opening a 3SNT for this particular purpose, which in theory could save significant rmd tax money due to EDB stretch and lower tax rate of our disabled son. However I want to make sure we don’t set up something that will spit out RMD money that we can’t utililize or redeploy. Right now he is living at home and his needs are modest. That could change if we were to opt for a private living situation (like Daymark living).

Eventually he will go to SSDI DAC. That could be in as little as just over a year if I filed early, or up to 8 years if I wait until 70. The calculators will generally say file at 62 due to the DAC payment plus child in care (the child in care would be cut in approx half due to family max). However as long as he is getting SSI and my wife is working I’m inclined to wait to increase my social security benefits.

Another potential complicating factor is I am applying, again, for SSI for our daughter (bipolar) other issues. She was rejected a few years ago and will probably be rejected again but I thought I’d try. If she were accepted that would get her SSI and Medicaid also which would be helpful. However whenenver I file for SS, both kids would go to DAC, but the total payment would not increase because we had already hit family max with son and child in care. That would be an even greater incentive for me to wait and increase my SS if both kids were getting SSI. Even if she were approved my expectation is eventually she will work enough such that she will no longer be eligible.

Another complicating factor, and this is definitely a “first world problem” type issue, is there could be even more inherited IRAs in the next 5-10 years. If those or part of those went to sons SNT, that could also save additional taxes, but at some point the distributions may become more than we can spend, which would disqualify benefits (or else leave in trust at trust tax rates). It could be enough however that the tax benefits would exceed the modest SSI benefits, which at that point may be worthwhile for me to file for SSI and do DAC.

So a lot of moving parts, and I am still learning. I’m coming around to your approach of having an 3SNT set up now for such scenarios as well as just becoming more familiar with the mechanics of maintaining one.

This stuff really can get complicated.
It doesn't matter whether the trust is in your Will or in a separate trust instrument. It's a matter of style rather than substance.

The trustees will be able to distribute or accumulate as much as they decide each year. They can consider income taxes and any other factors they think are relevant.

They can consult with a lawyer knowledgeable about Medicaid as to what distributions would or would not jeopardize Medicaid, though once the child gets Social Security disability benefits (actually two years after that) Medicaid will be less important.

SSI is small, though it gives you Medicaid.
What I am contemplating are inheritances that will likely come to me, from parents, the next 10 years give or take, while I am alive, including IRAs - and if the IRAs (and only the IRAs) went to my son directly in trust instead of me, the IRAs would get an EDB stretch and lower tax rate of my son whose only income would likely be SSI or DAC. The future RMD tax savings would likely be comparable to the amount of SSI over the same time period, or potentially much more.

This would require me to set up a separate SNT for those inheritances coming from my folks. Then simply having parents change beneficiary (primary or contingent) of the new trust. Let me know if I’m missing something.
startabatha
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

There are lots of other reasons to set up a stand alone special needs trust.

https://www.specialneedsalliance.org/th ... eds-trust/

The most important for me are knowing the trust has been approved by means-tested government benefit agencies before I die, ensuring the trust is drafted correctly and appropriately, and having practice administering all aspects of the trust (such as distributions including RMDs, taxes, record keeping, and dealing with audits from means-tested public agencies, etc. These are things I'd rather have personal practice with before handing trustee duties off to someone else.
Last edited by startabatha on Tue Jul 09, 2024 2:34 pm, edited 2 times in total.
startabatha
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

bsteiner wrote: Tue Jul 09, 2024 1:21 pm
....though once the child gets Social Security disability benefits (actually two years after that) Medicaid will be less important.
For many if not most disabled beneficiaries Medicaid remains super important even after they go on SSDI or RSDI DAC because it pays for things that Medicare does not pay for. For example Medicaid waivers pay for personal care attendants, respite, transportation, meals, and numerous therapies not covered by Medicare. Certain Medicaid waivers also pay for housing including group homes and nursing home care. Medicaid also pays for Medicare premiums, deductibles and copays which are not insignificant. These services and supports are vital for disabled people with low income and means.

Medicaid is ultra important after the disabled person's parents die, especially if their parents, like most, help support their adult disabled children until the parent dies by offering them low cost housing and free personal care. This is true especially if those parents don't have significant assets to leave their disabled child via inheritance via trust to continue to support their child and provide lifelong housing and personal attendant services for what is likely to be many decades. Depending on the individual's level of need, this can mean millions in Medicaid benefits over the course of a lifetime.
bsteiner
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Re: Inherited IRAs in special needs trusts and SSI

Post by bsteiner »

JBTX wrote: Tue Jul 09, 2024 1:45 pm ...

What I am contemplating are inheritances that will likely come to me, from parents, the next 10 years give or take, while I am alive, including IRAs - and if the IRAs (and only the IRAs) went to my son directly in trust instead of me, the IRAs would get an EDB stretch and lower tax rate of my son whose only income would likely be SSI or DAC. The future RMD tax savings would likely be comparable to the amount of SSI over the same time period, or potentially much more.

This would require me to set up a separate SNT for those inheritances coming from my folks. Then simply having parents change beneficiary (primary or contingent) of the new trust. Let me know if I’m missing something.
You are correct. There are a few ways to do this. They could have their lawyer draft it in their Wills. Your lawyer could give them language that they could put in their Wills. Or your lawyer could prepare a separate trust instrument (we sometimes call it a receptacle trust) to which they could leave the IRAs (or whatever assets they wanted).

Sometimes one way is best in getting parents to do this, and sometimes another way is best.

The same, of course, applies to getting your parents to leave your inheritance in trust rather than outright.
startabatha
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

JBTX wrote: Tue Jul 09, 2024 1:00 pm That makes sense. I may end up opening a 3SNT for this particular purpose, which in theory could save significant rmd tax money due to EDB stretch and lower tax rate of our disabled son. However I want to make sure we don’t set up something that will spit out RMD money that we can’t utililize or redeploy. Right now he is living at home and his needs are modest. That could change if we were to opt for a private living situation (like Daymark living).
Once your son transitions to RSDI DAC, the SSI-imposed 100k ABLE account asset cap goes away. That means that any portion of the RMD that your disabled child does not need for immediate needs can go directly to his ABLE account (subject to the annual ABLE maximum contribution limits from all sources).

Since you mentioned a private pay facility, Daymark Living, let's play a "what if" situation if a disabled adult child on Medicaid lives there and is supported by a third party like a parent, or a 3SNT. I am assuming Daymark does not take Medicaid for payment. I highly doubt it. It is a "nice placement" for people of means.

Out of curiosity I just checked and Daymark Living's monthly fee has risen to $4,900 a month (hello inflation, it used to be $3500) and includes rent, utilities and three meals a day. You have given a great example of how 3SNTs are put between a rock and a hard place in supporting a disabled adult child's living needs and maximizing means-tested government benefits - it is darn near impossible in this situation. Even if the trustee were to funnel 3SNT funds to an ABLE account to pay for housing, the maximum that the trust could fund (assuming there are no other ABLE contributions from anyone else or the child's earnings) is 18k per year which is only $1,500 a month, falling short of Daymark's fee and most private supported housing's fees. Which means the remaining $3,400 would have to come from the beneficiary's RSDI DAC or SSDI, which is not going to happen because the *maximum* full retirement age social security amount of a person (parent of the DAC in this case ) is presently $3,822 per year and 75% of that (the RSDI DAC amount if parent is dead) is $2,866.50. This means the only way an adult child with a 3SNT can live in Daymark or any place that is so expensive is if the 3SNT pays for it outright and that means there may be some type of penalty or deemed income applied by Medicaid, depending on the type of Medicaid. Probably not enough to get the beneficiary kicked off Medicaid, but good luck getting a corporate trustee to understand the nuances and accept that they may have to make a 3SNT distribution for housing even if it means a deeming penalty toward Medicaid. I have yet to find a corporate trustee to understand this. Even the ARC of Texas trustee insisted they would NEVER make a 3SNT distribution for housing. Have you thought this through or discussed it with your successor corporate trustee?
JBTX wrote: Tue Jul 09, 2024 1:00 pm Eventually he will go to SSDI DAC. That could be in as little as just over a year if I filed early, or up to 8 years if I wait until 70. The calculators will generally say file at 62 due to the DAC payment plus child in care (the child in care would be cut in approx half due to family max). However as long as he is getting SSI and my wife is working I’m inclined to wait to increase my social security benefits.
Understand that.
JBTX wrote: Tue Jul 09, 2024 1:00 pm Another potential complicating factor is I am applying, again, for SSI for our daughter (bipolar) other issues. She was rejected a few years ago and will probably be rejected again but I thought I’d try. If she were accepted that would get her SSI and Medicaid also which would be helpful. However whenenver I file for SS, both kids would go to DAC, but the total payment would not increase because we had already hit family max with son and child in care. That would be an even greater incentive for me to wait and increase my SS if both kids were getting SSI. Even if she were approved my expectation is eventually she will work enough such that she will no longer be eligible.
Is your daughter under age 22? In order to qualify for RSDI DAC, the disabled adult child has to be found disabled by SSA before age 22. If she is working, she may qualify for SSDI on her own work record.
JBTX wrote: Tue Jul 09, 2024 1:00 pm Another complicating factor, and this is definitely a “first world problem” type issue, is there could be even more inherited IRAs in the next 5-10 years. If those or part of those went to sons SNT, that could also save additional taxes, but at some point the distributions may become more than we can spend, which would disqualify benefits (or else leave in trust at trust tax rates). It could be enough however that the tax benefits would exceed the modest SSI benefits, which at that point may be worthwhile for me to file for SSI and do DAC.
Again, if your son goes on RSDI DAC (and off of SSI), the ABLE account maximum goes away and more RMDs can be put in ABLE up to the annual contribution maximum. However if the RMD is too large, you may not be able to do that, forcing the RMD into staying in trust and being taxed at trust tax rates. This is why I am converting as much as I can to Roth before I die so that the trustee does not have this tax dilemma. I know you cannot control that for your inheritances.
JBTX wrote: Tue Jul 09, 2024 1:00 pm So a lot of moving parts, and I am still learning. I’m coming around to your approach of having an 3SNT set up now for such scenarios as well as just becoming more familiar with the mechanics of maintaining one.
The last part of your sentence cannot be emphasized enough. Understanding the mechanics of all this before we die and passing on our knowledge and advice is going to be key. In my alternate imaginary universe, I leave enough money to my son via trust so that he doesn't need Medicaid and we just drop it altogether before I die, because all their rules make maintaining means-tested benefits after our deaths almost impossible. There are so many traps and gotchas. It is practically a full time job now while I am alive, all the more so with an inherited 3SNT, a new trustee and dealing with Medicaid after our deaths.
JBTX wrote: Tue Jul 09, 2024 1:00 pm This stuff really can get complicated.
Yes, I wish there was a lay group devoted to the management of 3SNTs so we can discuss the ins and outs of managing one. I have talked to a couple siblings managing one and it is fraught with all kinds of issues even when they are co-trustee with a corporate trustee.
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JBTX
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Re: Inherited IRAs in special needs trusts and SSI

Post by JBTX »

bsteiner wrote: Tue Jul 09, 2024 2:37 pm
JBTX wrote: Tue Jul 09, 2024 1:45 pm ...

What I am contemplating are inheritances that will likely come to me, from parents, the next 10 years give or take, while I am alive, including IRAs - and if the IRAs (and only the IRAs) went to my son directly in trust instead of me, the IRAs would get an EDB stretch and lower tax rate of my son whose only income would likely be SSI or DAC. The future RMD tax savings would likely be comparable to the amount of SSI over the same time period, or potentially much more.

This would require me to set up a separate SNT for those inheritances coming from my folks. Then simply having parents change beneficiary (primary or contingent) of the new trust. Let me know if I’m missing something.
You are correct. There are a few ways to do this. They could have their lawyer draft it in their Wills. Your lawyer could give them language that they could put in their Wills. Or your lawyer could prepare a separate trust instrument (we sometimes call it a receptacle trust) to which they could leave the IRAs (or whatever assets they wanted).

Sometimes one way is best in getting parents to do this, and sometimes another way is best.

The same, of course, applies to getting your parents to leave your inheritance in trust rather than outright.
At this point getting them to make any changes is an uphill battle. Having them draft or modify trusts or wills just won’t happen.
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beyou
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Re: Inherited IRAs in special needs trusts and SSI

Post by beyou »

bsteiner wrote: Tue Jul 09, 2024 1:21 pm It doesn't matter whether the trust is in your Will or in a separate trust instrument. It's a matter of style rather than substance.

...

They can consult with a lawyer knowledgeable about Medicaid as to what distributions would or would not jeopardize Medicaid, though once the child gets Social Security disability benefits (actually two years after that) Medicaid will be less important.

SSI is small, though it gives you Medicaid.
A separate trust can accept contributions NOW from grandparents or others who wish to contribute to the disabled person now, rather than waiting for the trust to be created at your passing. In my case I asked relatives to leave our disabled child out of their will etc, and have our SNT created at our passing, but I did consider this issue and decided our close relatives are not in a position to give much, and what little they have they do not leave directly to our child, their grandchild. But it can be an issue for some people. Either way a discussion should be had with grandparents or other close relatives who MAY leave to the disabled person.

You don't need SSI to get Medicaid, if income is low enough one can qualify for Medicaid in many states without SSI.
My child did get Medicaid BEFORE SSI as the process to get Medicaid was considerably less burdensome. Only financial review was necessary but for SSI you need medical and financial review before a benefit is granted. Took over a year to get SSI, took a few weeks to get Medicaid. What changes when you get SSI, is that Medicaid may be paid for by a different state agency (at least this is true in my state). Nothing much changed in regards to Medicaid when SSI was approved for my child.

Medicaid works WITH Medicare after 2 years. Medicare is supposed to become your primary medical insurance and Medicaid is active simultaneously. A different relative has both, and they get some services from Medicare and others from Medicaid. Medicaid also pays for part of Medicare premiums in her case. It is very useful to have and keep Medicaid, and Medicaid is NOT fully dependent on SSI (this relative on Medicare was never on SSI but got Medicaid due to financial reasons enabled in part via use of a trust).
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JBTX
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Re: Inherited IRAs in special needs trusts and SSI

Post by JBTX »

startabatha wrote: Tue Jul 09, 2024 3:12 pm
JBTX wrote: Tue Jul 09, 2024 1:00 pm That makes sense. I may end up opening a 3SNT for this particular purpose, which in theory could save significant rmd tax money due to EDB stretch and lower tax rate of our disabled son. However I want to make sure we don’t set up something that will spit out RMD money that we can’t utililize or redeploy. Right now he is living at home and his needs are modest. That could change if we were to opt for a private living situation (like Daymark living).
Once your son transitions to RSDI DAC, the SSI-imposed 100k ABLE account asset cap goes away. That means that any portion of the RMD that your disabled child does not need for immediate needs can go directly to his ABLE account (subject to the annual ABLE maximum contribution limits from all sources).

Since you mentioned a private pay facility, Daymark Living, let's play a "what if" situation if a disabled adult child on Medicaid lives there and is supported by a third party like a parent, or a 3SNT. I am assuming Daymark does not take Medicaid for payment. I highly doubt it. It is a "nice placement" for people of means.

Out of curiosity I just checked and Daymark Living's monthly fee has risen to $4,900 a month (hello inflation, it used to be $3500) and includes rent, utilities and three meals a day. You have given a great example of how 3SNTs are put between a rock and a hard place in supporting a disabled adult child's living needs and maximizing means-tested government benefits - it is darn near impossible in this situation. Even if the trustee were to funnel 3SNT funds to an ABLE account to pay for housing, the maximum that the trust could fund (assuming there are no other ABLE contributions from anyone else or the child's earnings) is 18k per year which is only $1,500 a month, falling short of Daymark's fee and most private supported housing's fees. Which means the remaining $3,400 would have to come from the beneficiary's RSDI DAC or SSDI, which is not going to happen because the *maximum* full retirement age social security amount of a person (parent of the DAC in this case ) is presently $3,822 per year and 75% of that (the RSDI DAC amount if parent is dead) is $2,866.50. This means the only way an adult child with a 3SNT can live in Daymark or any place that is so expensive is if the 3SNT pays for it outright and that means there may be some type of penalty or deemed income applied by Medicaid, depending on the type of Medicaid. Probably not enough to get the beneficiary kicked off Medicaid, but good luck getting a corporate trustee to understand the nuances and accept that they may have to make a 3SNT distribution for housing even if it means a deeming penalty toward Medicaid. I have yet to find a corporate trustee to understand this. Even the ARC of Texas trustee insisted they would NEVER make a 3SNT distribution for housing. Have you thought this through or discussed it with your successor corporate trustee?
I have not gotten into that level of detail. For me, this is a process. We have something in place, imperfect as it is, if something were to happen to us now. As I learn more, I am sure we will make tweaks. If I become so competent in this stuff that I think I can teach a trusted relative to do it, maybe I’ll revisit. I am already creating a list of trust items to discuss whenever we decide to do another revision.

We tried Daymark for a few weeks but pulled him out because son was getting bullied. It was an unfortunate set of events. It is overall a nice place, but they don’t take government benefits. Some of these places (like 29 acres) will invoice housing separately at a Medicaid acceptable level of rent and everything else is billed separately as ancillary services.
JBTX wrote: Tue Jul 09, 2024 1:00 pm Eventually he will go to SSDI DAC. That could be in as little as just over a year if I filed early, or up to 8 years if I wait until 70. The calculators will generally say file at 62 due to the DAC payment plus child in care (the child in care would be cut in approx half due to family max). However as long as he is getting SSI and my wife is working I’m inclined to wait to increase my social security benefits.
Understand that.
JBTX wrote: Tue Jul 09, 2024 1:00 pm Another potential complicating factor is I am applying, again, for SSI for our daughter (bipolar) other issues. She was rejected a few years ago and will probably be rejected again but I thought I’d try. If she were accepted that would get her SSI and Medicaid also which would be helpful. However whenenver I file for SS, both kids would go to DAC, but the total payment would not increase because we had already hit family max with son and child in care. That would be an even greater incentive for me to wait and increase my SS if both kids were getting SSI. Even if she were approved my expectation is eventually she will work enough such that she will no longer be eligible.
Is your daughter under age 22? In order to qualify for RSDI DAC, the disabled adult child has to be found disabled by SSA before age 22. If she is working, she may qualify for SSDI on her own work record.
She is over 22. She applied first time before. We will try to document that the disability happened before age 22 for DAC, although I guess there is a scenario where it would be better if she didn’t qualify for DAC. I also applied for disability on her limited work record - don’t know if it’s enough.
JBTX wrote: Tue Jul 09, 2024 1:00 pm Another complicating factor, and this is definitely a “first world problem” type issue, is there could be even more inherited IRAs in the next 5-10 years. If those or part of those went to sons SNT, that could also save additional taxes, but at some point the distributions may become more than we can spend, which would disqualify benefits (or else leave in trust at trust tax rates). It could be enough however that the tax benefits would exceed the modest SSI benefits, which at that point may be worthwhile for me to file for SSI and do DAC.
Again, if your son goes on RSDI DAC (and off of SSI), the ABLE account maximum goes away and more RMDs can be put in ABLE up to the annual contribution maximum. However if the RMD is too large, you may not be able to do that, forcing the RMD into staying in trust and being taxed at trust tax rates. This is why I am converting as much as I can to Roth before I die so that the trustee does not have this tax dilemma. I know you cannot control that for your inheritances.
JBTX wrote: Tue Jul 09, 2024 1:00 pm So a lot of moving parts, and I am still learning. I’m coming around to your approach of having an 3SNT set up now for such scenarios as well as just becoming more familiar with the mechanics of maintaining one.
The last part of your sentence cannot be emphasized enough. Understanding the mechanics of all this before we die and passing on our knowledge and advice is going to be key. In my alternate imaginary universe, I leave enough money to my son via trust so that he doesn't need Medicaid and we just drop it altogether before I die, because all their rules make maintaining means-tested benefits after our deaths almost impossible. There are so many traps and gotchas. It is practically a full time job now while I am alive, all the more so with an inherited 3SNT, a new trustee and dealing with Medicaid after our deaths.
JBTX wrote: Tue Jul 09, 2024 1:00 pm This stuff really can get complicated.
Yes, I wish there was a lay group devoted to the management of 3SNTs so we can discuss the ins and outs of managing one. I have talked to a couple siblings managing one and it is fraught with all kinds of issues even when they are co-trustee with a corporate trustee.
Thanks again for all the info.
terran
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Re: Inherited IRAs in special needs trusts and SSI

Post by terran »

I'm seeing food and housing issues mentioned a few times in this thread, so I wanted to point out that the rules for both are changing very soon. See the OP regarding food and my reply regarding housing in this thread.
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

Good reminder. I know food is going away as ISM for SSI recipients. So a 3SNT could pay for food without penalizing the beneficiary. Not sure how state Neducaid will interpret this and apply it yet.

I'm also not sure what the ramifications for 3SNT payments for shelter will be for state Medicaid. It is unclear at this time.
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Re: Inherited IRAs in special needs trusts and SSI

Post by Maroon80 »

startabatha wrote: Wed Jul 10, 2024 8:20 am Good reminder. I know food is going away as ISM for SSI recipients. So a 3SNT could pay for food without penalizing the beneficiary. Not sure how state Neducaid will interpret this and apply it yet.

I'm also not sure what the ramifications for 3SNT payments for shelter will be for state Medicaid. It is unclear at this time.
I just went through this with my disabled son, who receives SSDI as a DAC (not SSI) and Medicare. Medicaid is his supplement to Medicare and also gives him access to various waiver services, which are critical for him. At least in Pennsylvania, the State does not care about ISM for purposes of Medicaid eligibility. You personally, and your 3SNT, can spend whatever amount to meet any of the child's needs, including food and shelter, without it counting as income for determining Medicaid eligibility. I verified this with with two expert sources, including a legal person at a non-profit that is dedicated exclusively to helping people qualify for government health coverage. I also reviewed the state regs. (not light reading) and could find nothing indicating that ISM affects Medicaid eligibility. In addition, for disabled persons receiving waiver services, the cutoffs for income and assets differ from those for other Medicaid recipients. In our case, the asset limit is $8,000.

As a result of learning this, I no longer pay expenses from my son's ABLE account. I am contributing the maximum each year to the ABLE account and hope to see it grow so that he has as much as possible in this flexible, tax-advantaged account for future use.

As you know, Medicaid is a state program and you should check with an expert on your state's rules. The benefits rules are highly technical and can be difficult to find someone who really knows them well.
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Re: Inherited IRAs in special needs trusts and SSI

Post by typical.investor »

Maroon80 wrote: Wed Jul 10, 2024 4:36 pm
startabatha wrote: Wed Jul 10, 2024 8:20 am Good reminder. I know food is going away as ISM for SSI recipients. So a 3SNT could pay for food without penalizing the beneficiary. Not sure how state Neducaid will interpret this and apply it yet.

I'm also not sure what the ramifications for 3SNT payments for shelter will be for state Medicaid. It is unclear at this time.
I just went through this with my disabled son, who receives SSDI as a DAC (not SSI) and Medicare. Medicaid is his supplement to Medicare and also gives him access to various waiver services, which are critical for him. At least in Pennsylvania, the State does not care about ISM for purposes of Medicaid eligibility. You personally, and your 3SNT, can spend whatever amount to meet any of the child's needs, including food and shelter, without it counting as income for determining Medicaid eligibility. I verified this with with two expert sources, including a legal person at a non-profit that is dedicated exclusively to helping people qualify for government health coverage. I also reviewed the state regs. (not light reading) and could find nothing indicating that ISM affects Medicaid eligibility. In addition, for disabled persons receiving waiver services, the cutoffs for income and assets differ from those for other Medicaid recipients. In our case, the asset limit is $8,000.
Do you remember how you found that info? Was that in the state regs? Was it under eligibility or something? Any suggestions on what it might be under?
Maroon80 wrote: Wed Jul 10, 2024 4:36 pm As a result of learning this, I no longer pay expenses from my son's ABLE account. I am contributing the maximum each year to the ABLE account and hope to see it grow so that he has as much as possible in this flexible, tax-advantaged account for future use.
Ah yeah, if an ABLE balance exceeds $100,000 it only affects SSI (not applicable to your son) and not Medicaid. Thanks for the reminder.
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Re: Inherited IRAs in special needs trusts and SSI

Post by Maroon80 »

typical.investor wrote: Wed Jul 10, 2024 10:53 pm

Do you remember how you found that info? Was that in the state regs? Was it under eligibility or something? Any suggestions on what it might be under?

I read the state eligibility rules for income--what counts and what doesn't. No mention of ISM counting. As I mentioned, I also spoke with two benefits experts. You might be able to get an answer by calling the state department of human services (the ones who check eligibility), but my experience with them is mixed.
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Re: Inherited IRAs in special needs trusts and SSI

Post by startabatha »

Every state is different with their Medicaid rules.
Sometimes it's only one aspect of Medicaid that penalizes for support and maintenance. For instance Medicaid in my state requires the Medicaid recipient pay their fair share of housing expenses or they get penalized with deemed income when it comes to their Medicare Savings Program. See below for more detail from my advocate who used to work for the state. These rules can be obscure and difficult to find. You really need a Medicaid *expert* in your state to tell you for sure.


"I have recently discovered a reason why all Medicaid recipients may need to continue to pay their "fair share" of shelter expenses and food, including Medicaid recipients who get SSDI benefits through a parent who is retired, disabled, or deceased (RSDI DAC) and who get Medicaid benefits through an HHSC Medicaid program other than Disabled Adult Child (HHSC DAC). This also applies to SSDI recipients who get SSDI benefits based on their own earnings.

HHSC processes eligibility for four Medicare Savings Plans (MSP), including QMB, SLMB, QI-1, and QWDI, which offset the recipient's cost sharing for Medicare benefits (Parts A, B, and D or Parts C and D). The eligibility formula for the Medicare Savings Plans also includes deeming criteria to apply "deemed income" to any Medicare enrollee who doesn't pay their "fair share" of household expenses.

HHSC DAC clients are exempt from this MSP eligibility rules, but if the Medicare recipient ever loses their HHSC DAC benefits (unfortunately, this can happen), they will need to meet the MSP eligibility rules.

If the SNT pays a portion of their household expenses, then HHSC will add "deemed income" of $400 to $500 to their monthly income, which could cause them to loose access to a MSP to offset the cost of Medicare Parts A, B, and D or Medicare Parts C and D.

So even though the SNT can pay for housing costs for the Medicaid recipient, it is wiser to use funds in the SNT for other things (including non-routine housing costs such as repairs and maintenance) than to use them for routine housing and food costs. THIS POLICY IS VERY OBSCURE - I JUST FOUND IT A MONTH AGO WHEN FIGHTING SOME HHSD MEDICAID DENIALS."
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Re: Inherited IRAs in special needs trusts and SSI

Post by bsteiner »

beyou wrote: Tue Jul 09, 2024 4:33 pm ...
A separate trust can accept contributions NOW from grandparents or others who wish to contribute to the disabled person now, rather than waiting for the trust to be created at your passing. ...
It can. There are 3 ways to accomplish that: (i) the other person can put the appropriate provisions in his/her Will, (ii) you can give the other person language to include in his/her Will, or (iii) you can create a separate trust and have the other person leave the bequest to that trust.

However, if more than one person contributes to the same trust, it can get complicated. You could have a trust that's a grantor trust in part, a trust that's taxable in part in different states, or a trust that's GST exempt in part. Different states could have different rules against perpetuties. It's easier to combine trusts than to divide a trust. So before doing that, you should make sure it won't cause any of these complexities.
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