Sandra Reed’s Life Care Planning: ‘Tis the season for giving — do more good than harm

Attorney Sandra W. Reed answers your life planning questions.

Attorney Sandra W. Reed answers your

life planning questions.

This country is known for its compassionate fundraising for those in need. And more at Christmas than at any other time, except, perhaps during disasters like Katrina or Sandy.

A family has sustained a horrendous car accident or a child is diagnosed with a life-threatening illness and community members rally to create a fund to assist them. What possible harm could be done from such generosity? Indeed, a great deal if the funds provided lead to unexpected consequences, such as the reduction or loss of means-tested benefits.

Most fundraising efforts support an individual’s or family’s needs on a short-term basis.  Most of the time they do not replace the longer-term assistance of means-tested government benefits, such as Supplemental Security Income (SSI) or Medicaid.  And if Medicaid is the only source of medical insurance, the loss of these benefits could be catastrophic. Therefore, it is essential for those who plan a fundraising effort to determine what benefits are being received by the intended recipient of the money collected.

SSI provides monthly cash allotments to assist in providing food and shelter for those who are blind, disabled, or children who meet certain income and resource restrictions. The maximum monthly payment in 2013 is $710. However, this amount can be reduced if a recipient gets cash or in-kind support from other sources. Because an individual who receives even the lowest amounts of SSI automatically becomes entitled to the medical benefits of Medicaid, this benefit frequently far exceeds the value of the monthly cash payment.

Even an organization which qualifies as a Section 501(c)(3) under the Internal Revenue Code  is limited to distributing no more than , $2,000 a year to a child under the age of 18 who suffers from a life-threatening condition. The excess of that amount will be counted as unearned income by the child, causing disqualification for certain governmental benefits.

Conversely, Social Security, Social Security Disability and Medicare benefits are not means-tested.  Therefore, the receipt from private efforts will not cause these benefits to be reduced or lost.

Tax Consequences of Fundraising

Another issue which needs to be addressed with fund-raising efforts is their tax consequences.  For tax purposes, gifts are not considered income.  However, this is not the case for SSI and Medicaid benefits.

Consult with a Lawyer Beforehand

There is no question that consultation with an attorney prior to launching fundraising would be the best practice. Practically speaking, this is not easy in light of the need to seize the moment to maximize participation. Consequently, fund raisers usually consult a lawyer, if at all, after the fact.

When considering participation in a fundraising project, at least being aware of some of the pitfalls will help avoid doing more harm than good.

Trusts Are Best Depository of Funds

In many situations, if legal advice is sought beforehand, the attorney will recommend that a trust be established. The same advice may be given even when the consultation succeeds the fundraising. However, the most prudent time to establish the trust is before the fundraising effort begins.

There are two types of trusts that could be established as a depository for the funds collected: (1) a third-party trust and (2) a self-settled special needs trust. A third party trust is one set up in the name of someone or some entity other than the beneficiary of the funds. Funds would be paid into the trust rather than to the beneficiary directly.

A self-settled trust is one established for the benefit of a disabled person who is under the age of 65. Federal law allows a disabled person to retain assets in a self-settled trust without compromising the right to retain governmental benefits. However, upon the death of the individual the self-settled trust provides that Medicaid receives any funds remaining in the trust up to the amount that Medicaid expended on the individual’s care.

If funds collected are substantial, a stand-alone self-settled trust can be created by a parent, grandparent, legal guardian or court for the benefit of the disabled person. The trust itself then will bear the bulk of the expenses of creating and administering the trust.

However, if the fund-raising is not as successful as anticipated, generating limited amounts to pour into the trust, a pooled self-settled trust is the better choice. The pooled trust is established and maintained by a nonprofit organization. Each individual receives a separate subaccount, but the assets are pooled for investment and management purposes. In the case of a pooled trust, the beneficiary may establish the trust for his or her own benefit.

For Whose Benefit Should Funds Be Collected?

The funds should be sought for the benefit of the trust rather than for the benefit of the individual who will ultimately received them. Therefore, the language used in soliciting is crucial.

Whether to use a third-party trust or a self-settled trust will depend, in part, on how the fund was set up to receive the donations. For instance, if the money comes in the form of a check, the funds are attributed to the person whose name is on the check. If the check is made out to the beneficiary, the beneficiary is considered the recipient of the income.

Typically, fundraisers will take the practical approach of designating cash payments as to the beneficiary. If the funds go directly to the beneficiary, the third-party trust will not be an alternative. A self-settled special needs trust will be the only option.

Going into the season with a spirit of generosity makes the holidays richer. But take special care to actually meet the goal of helping others rather than unwittingly jeopardizing important means-tested benefits.

Sandra W. Reed is an attorney living and practicing in Glen Rose.  She is of counsel with the elder law firm Katten & Benson in Fort Worth.  If you have any questions, you may contact her by phone at 254-797-0211 or by email at swreed2@yahoo.com

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