The PrivateBanks Role as GUARDIAN of The PrivateBanks Role as - - PowerPoint PPT Presentation

The PrivateBank’s Role as GUARDIAN of The PrivateBank’s Role as GUARDIAN of the Estate the Estate – March 21, 2013 March 21, 2013

The PrivateBank’s Role as GUARDIAN of the The PrivateBank’s Role as GUARDIAN of the Estate/ Estate/ OBRA Trust

OBRA Trust

• Best interest of the Ward (Guardianship estates)/ Sole Benefit of the beneficiary (OBRA

trust). W d ith b

• Ward can either be:
• A minor (under age 18); or
• A disabled adult (see below).
• Definition of “disabled person” under Illinois statute for guardianship purposes:
• Not fully able to manage his estate due to mental deterioration or physical incapacity;
• r due to mental illness or a person with a developmental disability; or because of

bli idl d b h i f i t i t d d gambling, idleness, debauchery, or excessive use of intoxicants or drugs, so spends or wastes his estate as to expose himself or his family to want or suffering; or is diagnosed with fetal alcohol syndrome or fetal alcohol effects. (755 ILCS 5/11a‐2).

• “Decedent’s estate” definition of “capacity”: must be of sound mind and memory at the

time of executing the Will (755 ILCS 5/4‐1).

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Annual Accountings to the Probate Court Annual Accountings to the Probate Court

• All accountings (yearly) are presented and approved by the Court, as well as attorney

fees and guardianship fees (petitions).

• No Bond is required for Corporate Fiduciary (1 ½ x FMV for individual

fiduciary…premiums to be annually).

• GAAP accounting (no P & I accounting for Guardianship estates):
• “Decedent’s Estate” have P& I accounting (760 ILCS 15/6)
• OBRA trusts have P&I accounting (760 ILCS 15/3)
• Guardianship estates do NOT have P&I accounting (GAAP)

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Investment Management: Investment Management:

– No more than 67% in equities (755 ILCS 5/21‐2.12). – Fixed Income securities: BBB or better in rating (“investment grade”) (755 ILCS 5/21‐2.08). – Mutual funds are allowed (755 ILCS 5/21‐1.07) and so are Open‐end registered investment companies (REITs) (755 ILCS 5/21‐1.05a). – Only the 15 permitted investments are allowed under the statute (755 ILCS 5/21‐2 Only the 15 permitted investments are allowed under the statute (755 ILCS 5/21 2 through 2.15). – IPS (investment policy statement)/Asset Allocation/Asset Classes: Specific Fund, ETF, or S.A.M (Separate Asset Manager). C h l d d f l b f h d – Cash Flow needs and financial objectives of the ward. – If applicable, reflect existence of Structured Settlement (annuity) in management of liquid assets; insurance company with an investment grade rating (755 ILCS 5/21‐ 2.11).

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Investment Management (Continued): Investment Management (Continued):

– Prudent Investor rule (760 ILCS 5/5) for “trusts” vs. Prudent Person rule for “estates” for 13 out of the 15 investments allowed (Estate of Joseph Collins Lieberman a Minor vs The Northern Trust: Appellate Court of Illinois 2nd District Lieberman, a Minor vs. The Northern Trust: Appellate Court of Illinois, 2nd District No 02‐P‐1053 and 02‐P‐1054).

• Guardian estates: prudent person rule (except for 2 investments of mutual

funds and common trust funds which have a higher standard of care of prudent i t l ) investor rule).

• Decedent estates: prudent person rule (except for 2 investments); 9 allowed

investments (per statute 755 ILCS 5/21‐1) except for 2 investments that require the higher standard of care of the prudent investor rule plus whatever the Last Will & Testament allow the executor to invest in.

• Trusts: prudent investor rule (higher standard of care for trusts) and this would

include OBRA trusts.

• Still a bit of a gray area….

Still a bit of a gray area….

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Custody/Other Risks/Petition the Court Custody/Other Risks/Petition the Court

• Custody of Assets…Safety from creditors (in an escrowed segregated account, thus free

from general creditors of the bank).

• Other risks: health insurance and umbrella policy (slip and fall).
• Petition the Court (via the Attorney) for:

– Budget amount per month (initial budget, temporary budget, permanent budget):

• Medical expenses
• Medical expenses
• Physical therapy
• Occupational therapy
• Caretaker expenses

p

• Other

– Special major purchases (Van, etc.). – Petition for attorney fees and guardianship fees. – “Annual Report” filings with the court for disabled (medical and general update report)…reprinted form that you fill in and update yearly.

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Preparation of Income Tax Returns for the Preparation of Income Tax Returns for the Ward (Federal and State 1040s) Ward (Federal and State 1040s)

– Guardianship estate is ignored under the Federal income tax laws. – For minors the “kiddie tax” rule for “passive income” over a threshold amount [IRC For minors, the kiddie tax rule for passive income over a threshold amount [IRC Section 6201(c)]. Federal IRS Form 8615. – Need copy of parent’s return (due to the “kiddie tax” issue, if applicable). – Who claims the ward as a “dependent” as a personal exemption on the 1040 (over 50% f th t t t l th f t )? 50% of the support test, plus other factors)? – If an OBRA trust, prepare the 1041 return as well. – Structured Settlement annuities (qualified annuities) are generally income “tax‐free” each month over the term of the annuity. A mere promise to pay by the insurance y p p y y carrier (no segregated account), so rating of the insurance carrier is important. – Non‐qualified deferred commercial annuities are partially taxable (exclusion ratio calculation).

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Cash Flow Needs of the Estate: Cash Flow Needs of the Estate:

– Budget per month; – Special major purchases; and – Fees: guardianship, attorney, social worker fees, miscellaneous.

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Estate/Gift Tax Planning Estate/Gift Tax Planning

• Some Judges allow this type of planning:

– Annual gifts of $14,000 per donee per annum. – Heirs at Law (natural objects of their bounty) [755 ILCS 5/11‐13(b)]. – Upon death of the ward, convert the “guardianship estate” over to a “decedent’s estate.” Do a “final accounting” for the guardianship estate, and then transfer over the assets to the probate estate of the decedent (get an FEIN number for the decedent’s estate).

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3 Types of “Special Needs Trusts” 3 Types of “Special Needs Trusts”

• OBRA Trust: “pay‐back” to the State upon death or termination (Medicaid liens). Don’t be confused,

there are 3 types of “special needs trusts” and this phrase is used “loosely,” yet you should know the real differences as follows: 1 Phillips trust (3rd party‐settled; private trust; no pay‐back) Phillips Trust 114 ILL 2nd 85 91 500

• 1. Phillips trust (3

party‐settled; private trust; no pay‐back) Phillips Trust 114 ILL 2 85,91, 500 N.E. 2d 29 (1986) (Phillips II).

• 2. OBRA trusts: 2 kinds (self‐settled trusts) both of which are “pay‐back” trusts:
• 2a. Pooled OBRA trust (Illinois Disability Association) 42 USC Section 1396p(b) (D)(4)

(C) ….used to be…could be any age, but recently the law was changed to: (C) used to be cou d be a y age, but ece t y t e aw was c a ged to » General rule: can’t do a pooled OBRA trust if over age 65, but there are exceptions if:

• The ward is deemed to be “disabled”*; and
• The Guardian is the Public Guardian or State Guardian….(gov’t guardian).

The Guardian is the Public Guardian or State Guardian….(gov t guardian).

• 2b. OBRA trust for P.I. injuries (D) (4) (A) ….must be under age 65 at the time of funding.

(760 ILCS 5/15.1).

• Trust for the “Sole Benefit” of the beneficiary: [42 USC Section 1396p (d) (4) (A)], Section 120.347 of

Trust for the Sole Benefit of the beneficiary: [42 USC Section 1396p (d) (4) (A)], Section 120.347 of the Illinois Administrative Code 89 Ill. Admin. Code Section 120.347; and 760 ILCS 5/15.1.

• * “Disabled” defined under SSA: not able to be gainfully employed.
• Upon death is the Trust included in the “gross estate”? Probably not, but depends.

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OBRA Trust (D)(4)(A): Intent to Supplement…. OBRA Trust (D)(4)(A): Intent to Supplement….

– Intended to supplement, not supplant, means‐tested government benefits. Yet, it is a “pay‐back” trust upon death or termination of the OBRA trust (Medicaid liens, etc.), yet still some advantages here, such as:

• P.V. of money (use of the funds in the OBRA trust are invested inside the

trust for years before pay‐back is necessary).

• Reimbursement later on is at the Medicaid billing rates (not the private
• Reimbursement later on is at the Medicaid billing rates (not the private

insurance carrier billing rates).

• Attorney General usually will negotiate with you as the amount owed

(discounted), yet State is having deficit problems, so this may change.

• A major hospital stay (30 to 60 days in the hospital) may wipe out the

guardianship estate funds, while the OBRA trust allows Medicaid coverage. Trying to forecast (predict) the future…weigh the costs and probability of this happening?

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OBRA Trust (D)(4)(A): Discretionary Trust OBRA Trust (D)(4)(A): Discretionary Trust

– Discretionary trust: Court approval (for Cook County) + notice to Attorney General (Bill

Arnold) of the OBRA trust and ask for his “approval and comments” on the actual draft of the OBRA trust document + bank’s trust discretionary committee (760 ILCS 5/15.1). Other counties might not require court approval for smaller items…depends.

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OBRA Trust (D)(4)(A): Disbursements OBRA Trust (D)(4)(A): Disbursements

– Disbursements should be directly to the vendors (not to the beneficiary). Keep receipts/vouchers and records in case of audit by:

• The Court (G.A.L. appointed to report to the Judge);
• Social Security (OBRA is a federal statute)
• Social Security (OBRA is a federal statute);
• Attorney General (Bill Arnold) (for Illinois Medicaid Liens); or
• The IRS: income tax issues or estate/gift tax issues….rare.

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OBRA Trust: Irrevocable; Annual Accounting; OBRA Trust: Irrevocable; Annual Accounting; FIT FIT

– Irrevocable trust (but can have language that allows for amendments limited to law changes, etc. to keep in line with the intent of the OBRA statute, etc.). A l A ti t th t ( d t th Att G l Bill A ld hi – Annual Accountings to the court (and copy to the Attorney General, Bill Arnold or his stead). “Notice up” Attorney General for any withdrawals that are subject to court approval. – For Federal Income Taxes purposes ‐‐ 3 choices for OBRA trust:

• Usually a “grantor trust” for FIT purposes (all flows out to the bene's 1040

return….a conduit); IRC Section 671‐679.

• But can be a “complex trust” (trust pays the capital gains tax and income tax on

net earnings that are not distributed out to the bene) [IRC 642]; or net earnings that are not distributed out to the bene) [IRC 642]; or

• Q.D.T. (qualified disability trust: get personal exemption deduction as if a “single

individual” filing), IRC 642(b) (2) (c). – Fiduciary duties of the trustee under the trust agreement and under State law:

• Highest standard of care under the law.
• Protect oneself from lawsuits for breach of fiduciary duty:
• Investments
• List of Fiduciary duties

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• List of Fiduciary duties

Example: OBRA Trust vs. Guardianship Example: OBRA Trust vs. Guardianship

• Example (illustration) with different scenarios: pros and cons to weigh of the advantages

and disadvantages and risks associated with choosing between going with: G di hi t t OBRA t t – Guardianship estate or OBRA trust; – Life Care Plan: social worker expert; – Medical insurance/P.T./O.T./prescriptions, etc. – Must be familiar with SSA, SSI, SSD, Medicaid, etc. Must be familiar with SSA, SSI, SSD, Medicaid, etc.

• Risks to recap for both Guardianship estates and OBRA trusts:

– Family conflict/Investment risks/Admin risks/Legal risks/Tax risks – Conflict of interest: who does your attorney represent? – “Soft issues” of family members, relatives, etc….

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J h P l S (JD CPA MST) J h P l S (JD CPA MST) John Paul Sweeney (JD, CPA, MST) John Paul Sweeney (JD, CPA, MST) Managing Director Managing Director The PrivateBank and Trust Company The PrivateBank and Trust Company 120 S. LaSalle St. (7 120 S. LaSalle St. (7th

th Floor)

Floor) Chi IL 60603 Chi IL 60603 Chicago, IL 60603 Chicago, IL 60603 (312) 564 (312) 564‐1737 1737