The Voice is the e-mail newsletter of The Special Needs Alliance. This installment was written by Nancy Gibson, Esq., a Montana elder law and disability law attorney. Her Missoula-based practice spans the state of Montana. She is a member and past director of The Special Needs Alliance, an invitation-only organization of attorneys specializing in special needs and settlement planning. She is actively involved with the National Academy of Elder Law Attorneys (NAELA), an organization dedicated to improving the lives of the elderly and persons with special needs. She currently is serving a second two-year term on the NAELA board of directors. Ms. Gibson limits her practice to elder and disability law, including estate planning and administration, but the majority of her cases involve special needs trusts and/or settlement planning.

January 2010 - Vol. 4, Issue 1

United States treasury check on Form 1040 2010 Medicare premiums will increase for some beneficiaries of large special needs trusts. Beneficiaries, their family members, trustees and special needs planners should be aware of the financial consequences of this change.

“Income” for tax purposes differs from “income” for public benefit purposes. Many special needs trust beneficiaries have little income paid directly to them. They qualify for public benefits based upon financial need, even though they may receive substantial benefits from trust assets held for them during their lifetimes. The interest and dividend income generated by special needs trust assets should not affect eligibility for SSI, Medicaid or Medi-Cal if the trust is properly drafted and administered.

One responsibility of a trustee is to decide how trust income will be reported to the IRS. Income earned on assets held in a third-party special needs trust, which is funded with assets of someone other than the beneficiary, may pass through to a beneficiary on an IRS Form K-1 to the extent distributions are made for the benefit of the beneficiary during the year. The income from the K-1 is reported on the beneficiary’s 1040 tax return and taxed at the personal income tax rate of the beneficiary. In the case of a self-settled special needs trust, which is funded with assets of the beneficiary and is a grantor trust, trust income may be reported on the beneficiary’s personal tax return, even if no distributions are made during the year. This pass-through of income is a beneficial method of allocating tax liability, as most special needs trust beneficiaries are in a low tax bracket with less tax being paid than if the income were taxed at the higher trust tax rates.

Although income earned by a special needs trust should not impact public benefits eligibility, it may impact the beneficiary’s Medicare premium amounts. Beginning January 1, 2007, income reported on the beneficiary’s personal income tax return, including income from a special needs trust, can result in a higher Medicare premium two years later. Thus, 2009 was the first year for Medicare recipients to experience the income-related change to their Medicare premium amount.

Most Medicare beneficiaries will continue to pay $96.40 for their 2010 Part B premium. This continuation of the 2009 premium amount applies for beneficiaries who currently have the Social Security Administration (SSA) withhold their Part B premiums and who have annual incomes less than $85,000 (or less than $170,000 if filing jointly).

For individuals who do not have SSA withhold the Part B premium, effective January 1, 2010, the basic Medicare premium is rising by 15 percent to $110.50. In addition, Medicare premiums will be increased for Medicare beneficiaries who have what the Medicare program computes as “modified adjusted gross income” (or MAGI) over $85,000 for a single person or $170,000 for a couple. Premiums can be as high as $353.60 a month for a Medicare beneficiary with an adjusted gross income greater than $214,000 on an individual return, or $428,000 on a jointly filed return.

The 2010 Part B premium amount is based on the beneficiary’s annual income as reported on the beneficiary’s tax return from two years earlier. So for 2010, the premium will be based on the beneficiary’s 2008 tax return. Specifically, if a beneficiary’s “modified adjusted gross income” is greater than the threshold amounts ($85,000 in 2010 for a beneficiary filing an individual income tax return or married and filing a separate return, and $170,000 for a beneficiary filing a joint tax return) the beneficiary will pay a higher Medicare premium. The 2010 Part B monthly premium rates for these individuals are:

Part B premiums by income – 2010
Individual tax filers Joint returns
 Less than $85,000
 Less than $170,000
 $96.40 (if withheld); $110.50 (if not withheld)
 $85,000 – $107,000
 $170,000 – $214,000
 $107,000 – $160,000
 $214,000 – $320,000
 $160,000 – $214,000
 $320,000 – $428,000
 More than $214,000
 More than $428,000

In addition, the monthly premium rates to be paid by a beneficiary who is married, but files a separate return from his or her spouse and lives with the spouse at any time during the taxable year are:

Monthly premiums for married beneficiaries who file separate returns – 2010
Less than $85,000 $96.40 (if withheld); $110.50 (if not withheld)
$85,000 – $129,000 $287.30
More than $129,000 $352.60

Some special needs trust beneficiaries are upset and confused by this increase in their Medicare premiums because it is based upon income that they do not see in their bank account. They may not realize that their trust is earning interest, dividend, capital gains and even tax-exempt income, which is reported on their tax return and is therefore included in the Medicare program’s MAGI computations. In very limited circumstances where current income is substantially lower because of life-changing events, such as a death of a spouse, divorce or loss of a pension plan, there may be a basis to challenge this increase.

A modest special needs trust will probably not generate enough income to affect the beneficiary’s Medicare premium. However, this can be an issue with large trusts that are well invested and earning significant income. All in all, being the beneficiary of a significant income generating trust is not a terrible problem to have, even if it increases the beneficiary’s Medicare premium. If administered well, the special needs trust should provide significant benefits through asset management, public benefits eligibility and improvement in quality of life.

About this Article: We hope you find this article informative, but it is not legal advice. You should consult your own attorney, who can review your specific situation and account for variations in state law and local practices. Laws and regulations are constantly changing, so the longer it has been since an article was written, the greater the likelihood that the article might be out of date. SNA members focus on this complex, evolving area of law. To locate a member in your state, visit Find an Attorney.

 Requirements for Reproducing this Article: The above article may be reprinted only if it appears unmodified, including both the author description above the title and the “About this Article” paragraph immediately following the article, accompanied by the following statement: “Reprinted with permission of the Special Needs Alliance –” The article may not be reproduced online. Instead, references to it should link to it on the SNA website.