A recent discussion on the New York State Bar’s Association’s (NYSBA) Trusts and Estates Law Section’s list serve highlights the downsides of using a third-party supplemental needs trust (SNT) to buy real property.
A parent has a disabled child who is a Medicaid recipient and the beneficiary of a third-party SNT. Should the parent use the SNT to buy a house for the child’s exclusive occupancy?
The lawyers on the NYSBA list serve discussed the following possible issues:
- If the child is an SSI recipient, then the child must pay taxes, maintenance, and other “shelter costs” to avoid in-kind income under SSI rules. (In contrast to SSI, Medicaid doesn’t have an in-kind income concept.)
- Having the SNT buy the trust instead of the parent loses the step-up in basis upon the parent’s death.
The discussion suggests a weakness inherent in funding third-party SNTs in general while the grantor is alive. Transferring the assets upon the grantor’s death has benefits:
- It avoids any issue with SSI.
- The assets get a step-up in basis when the parent dies.
- The arrangement is revocable.
- There are no transaction costs to funding the trust while the grantor is alive.
- There is no inter vivos gift, so there is no gift tax return to prepare or pay for.
- It also avoids maintenance costs of a non-grantor trust, such as accounting and income tax preparation costs.
- Income tax deductions for real estate are preserved. (They are not if the trust is a nongrantor trust.)
Furthermore, although multiple parties can contribute to a third-party SNT, doing so creates several issues, such as having a portion of the trust that is exempt from federal generation-skipping transfer (GST) tax, while the other portion is GST taxable.