LAW FIRM BLOG

Special Needs Trusts

October 18, 2019

A special needs trust, also known as a supplemental needs trust, is a popular vehicle for those who want to retain their eligibility for public benefits, such as Supplemental Security Income (SSI) and Medicaid, that require their income or assets to remain below a $2,000 limit ($3,000, if married).

A special needs trust is designed to hold and protect financial assets for the benefit of a disabled beneficiary. The trust is a legal structure used to collect and manage the assets and may receive contributions from a variety of sources. The trust is created in a way so that it does not affect the beneficiary’s ability to receive government benefits. A special needs trust is frequently used to receive assets from a legal settlement, inheritance, workers compensation award, or Social Security back payment.

Special needs trusts are designed to supplement, not replace, the kind of basic support provided by government programs like Medicaid and SSI. A special needs trust is designed to provide a person with a disability the funds to enhance their quality of life while at the same time allowing them to remain eligible for needs-based public benefits.  Government programs provide essentials, such as medical care, food, clothing, and shelter. Such trusts pay for comforts and luxuries that public assistance funds don't cover. Even a trust with hundreds of thousands of dollars of assets won’t affect SSI and Medicaid eligibility.

Generally speaking, there are three types of SNTs: (a) a first-party special needs trust; (b) a pooled special needs trust; and (c) a third-party special needs trust.

The distinction between a third-party special needs trust and a first-party special needs trust is the source of funds. If the assets funding the trust belong to a third party, then the trust is a third-party trust. If the assets funding the trust are assets of the disabled beneficiary, then the trust is a first-party trust. Pooled trusts can be either third-party or first-party. All three name the person with special needs as the beneficiary. And there is no limit to the number of trusts that may be created for a particular beneficiary.

First-Party Special Needs Trusts
A first-party special needs trust, also commonly referred to as a “self-settled” trust, Medicaid payback trust, or “(d)(4)(A)” trust, is used when the assets contributed belong to the beneficiary. If these assets are put into a special needs trust, then they are excluded from government aid calculations. The offset to the ability to maintain government benefits even with substantial wealth in a special needs trust is that when the beneficiary dies, assets remaining in the trust can be claimed by the government to reimburse it for medical and other costs paid through government programs. If there are any funds left after reimbursing the local Medicaid agency, then the balance may go to the beneficiary’s remainder beneficiaries.

Until the Special Needs Trust Fairness Act became law late in 2016, the only persons or entities authorized to create an individual first-party SNT were the SNT beneficiary’s parent, grandparent, legal guardian, or a court. Since December 13, 2016, federal law also authorizes a mentally and legally competent SNT beneficiary to establish an individual first-party SNT.

First-Party Trust Requirements
•The individual with special needs has expenses that will not be met without setting aside assets in the SNT.
•The property used to fund the SNT does not exceed the amount that appears reasonably necessary to meet the special needs of the minor or adult.
•The trust must be an inter vivos trust, rather than a testamentary trust.
•It must be a spendthrift trust.
•It must be irrevocable.
•The beneficiary has to be a disabled person who exhibits a significant impairment in areas of daily living as defined in the Social Security Act.
•It has to be established prior to the beneficiary's 65th birthday.
•It has to function under its own Employer Identification Number (EIN).
•It has to be for the sole benefit of the disabled person.
•It must contain the required "Medicaid payback language" (whether repayment is applicable or not). And the state Medicaid agency must be the primary beneficiary of the trust.
•The beneficiary is not allowed a yearly distribution of trust funds via a Crummey clause.
•The beneficiary's assets must be used to fund the trust.

These trusts require filing with the SSA and state Medicaid agency and annual reporting and accounting requirements to the state. Each state has specific guidelines for the use of resources in a first-party special needs trust. Most states require prior approval of expenditures from a special needs trust, and some require that an annual budget be established. Failure to follow state rules will disqualify the trust and disqualify the beneficiary from Medicaid.

Pooled Special Needs Trusts
A pooled trust is an alternative to the first-party special needs trust. Pooled SNT programs can be used to establish both first-party and third-party SNTs, depending on whether the assets used to fund the trust belong to the person with disabilities or to a third party. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries. Pooled SNT programs have the following features:
•An account with the pooled SNT is established for the sole benefit of an individual with disabilities by the parent, grandparent, or legal guardian of the individual, by the individual personally, or by a court.
•The beneficiary of a first-party account must meet the government’s definition of “disabled.”
•A separate account is maintained for each individual beneficiary of the pooled SNT, but the administrator pools the assets of all accounts for purposes of investment and management and to lower cost and simplify administration.
•A master trust agreement governs the separate accounts of all SNT beneficiaries pursuant to a “joinder” document.
•While there is no express prohibition against establishing and funding a first-party account with a pooled SNT, if the beneficiary is sixty-five years of age or older, most states impose an eligibility penalty in that situation.
•For first-party accounts with pooled SNTs in all states any assets remaining in the beneficiary’s separate account upon his or her death, to the extent not retained by the pooled SNT, first must be used to reimburse the Medicaid program(s) of any state(s) that has provided medical assistance for the beneficiary. However, a state is not entitled to receive more than the amount remaining in the beneficiary’s separate account, even if the amount owed to the state is greater than the amount remaining in the deceased beneficiary’s separate account. Pooled trusts also include a provision that some of the remaining assets are passed on to the non-profit organization as payback for management of the trust.

Each beneficiary still has his or her own trustee, chosen by the non-profit organization. These appointed trustees purchase items for the beneficiary, just like a trustee appointed by the family or the court would.

Third-Party Special Needs Trusts
This type of SNT is a useful planning tool for people who want to set aside property for a beneficiary with disabilities, preserve essential public benefits during that beneficiary’s lifetime, and remain in control of where all of the remaining SNT assets will go upon the beneficiary’s death.

A third-party special needs trust is created with assets of family members or friends with assets of the third party for the benefit of a person with a disability. These trusts are typically designed to receive gifts that can help a family member with special needs while the donor is still living and to manage an inheritance for the person with special needs when the donor dies. Because the funds never belonged to the beneficiary, the government is not entitled to reimbursement for Medicaid payments made on behalf of the beneficiary upon their death, unlike with a first-party or pooled trust. Upon the beneficiary's death, the assets in a third-party special needs trust can pass to the donor's other relatives or anywhere else like not-for-profit agencies.

Third-Party Trust Features
•An absolute inability to hold funds belonging to the person with special needs.  If the trust beneficiary receives an inheritance or settles a personal injury case, the funds have to be placed in either a first-party trust or a pooled trust.
•It must be irrevocable.
•It must be established before the beneficiary's 65th birthday.
•It must function under it's own EIN.

Third-party SNTs can be included in a Last Will and Testament, established within an inter vivos trust that is designed to avoid probate (“Living Trust”), or drafted as a stand-alone SNT. These SNTs are typically funded upon the death of the beneficiary’s parents or the other individual(s) who established the SNT.

SNTs created under a will or as a sub-trust within a Living Trust do not come into existence (and therefore cannot receive gifts) until after the death of the individual whose will or living trust created the SNT. Therefore, a stand-alone SNT may be more useful if there are multiple donors who wish to fund the SNT. A stand-alone SNT exists during the lifetime of the person establishing the SNT, which allows the SNT to receive gifts from grandparents, friends, or even the person establishing the SNT, prior to the death of the SNT’s creator. Such an SNT is available as a receptacle for lifetime and post-mortem gifts from any third-party source without effecting eligibility for programs such as Medicaid or SSI for the individual with special needs.

SNT Can Pay For....
The person serving as trustee of the special needs trust can usually pay for anything for the person with special needs, as long as the purchase does not violate the terms of the trust. There are few restrictions on the distributions a trustee may make from an SNT as long as the distribution is for "supplemental and extra care over and above what the government provides" and is not for "support and maintenance" as defined by the eligibility rules of SSI as food and shelter. A special needs trust can typically pay for most other things a beneficiary might need to supplement his lifestyle. It is advisable that the trustee purchase any goods or items in the name of the trust and not the beneficiary. The trust can pay for a very broad range of goods and services as long as payment is made directly to the provider rather than to the person with disabilities. Examples of expenditures that would not result in any adverse consequences for SSI-eligibility determination purposes are:
•A house. A home for the beneficiary of an SNT will not effect his or her benefits if the title to the house is held in the name of the trust. The beneficiary is not deemed to be receiving shelter, which would impact eligibility for benefits. However, if the beneficiary receives only Medicaid (not SSI), the home value may be limited to $500,000 or $750,000;
•Automobile/van (only one). If the SNT purchases durable items (e.g. a car), the trust must be the owner (the car title may show trust as a lien holder). Additionally, the expenses for the vehicle's insurance, maintenance, and fuel are permitted;
•Accounting/legal services;
•Acupuncture/yoga/gym membership;
•Appliances/electronics (TV, DVD player, washer, dryer, microwave, refrigerator);
•Burial expenses (must be prepaid and are limited to $1,500 or less);
•Cable or satellite T.V. services, newspaper and other news-related magazines and periodicals;
•Caregiving, such as a personal care attendant covered by Medicaid;
•Clubs/dues (e.g. health clubs, service clubs, advocacy groups, museums);
•Computers/software/internet service;
•Conferences;
•Dental expenses not covered by Medicaid;
•Doctor expenses not covered by Medicaid;
•Dry cleaning/laundry services;
•Education/training/courses/classes/tutoring;
•Elective surgery;
•Entertainment (e.g. books, videos);
•Eyeglasses, hearing aids, and prosthetic devices;
•Fitness/exercise equipment;
•Furniture;
•Home renovations/repairs/maintenance/landscaping;
•House cleaning services;
•Life insurance policies (must have cash surrender values less than $1,500);
•Medical equipment like wheelchairs or specially-equipped vans not covered by Medicaid;
•Musical instruments/music lessons/sheet music;
•Non-food grocery items (e.g. laundry detergent, deodorant, soap, personal hygiene products, paper towels, toilet paper);
•Over-the-counter medications (including vitamins or herbal supplements);
•Pets, pet food, and veterinarian care;
•Physical therapy or vocational rehabilitation services;
•Psychological counseling not covered by Medicaid;
•Recreation (e.g. summer camp, movies, or social events);
•Sporting goods/athletic equipment;
•Storage units;
•Telephone services (cell phone);
•Tickets to concerts, theater, or sporting events (for the beneficiary and accompanying companion);
•Transportation/bus pass/taxicab/uber/lyft/rail pass/domestic airfare;
•Vacations (cannot pay for food).

In-Kind Support and Maintenance (ISM)
Food and shelter expenses paid for by the special needs trust (or any other source) are considered income as in-kind support and maintenance (ISM) and are prohibited. The following items will count as ISM:
•Food or restaurant meals
•Mortgage (including property insurance if required by the mortgage holder)
•Real property taxes (less any tax rebate/credit)
•Rent
•Heating fuel
•Gas
•Electricity
•Water
•Sewer
•Garbage removal
•Homeowners or condo association dues
•Utilities connection charges

Countable Resources Are Not Okay
Anyone who owns more than $2,000 worth of countable resources is not eligible for SSI. So a trustee should not give the beneficiary non-cash benefits worth more than $2,000. If a trustee gives the beneficiary countable assets worth less than $2,000, the beneficiary’s SSI grant will be reduced, dollar-for-dollar, in the month the income is received. (A small exception to this rule is that the first $20 of a gift received in a given month is not counted.) This is significant because if the SSI recipient is receiving less than 1/3rd of the maximum SSI benefit, distributions from ISM can remove someone from Medicaid (most Medicaid programs require that the beneficiary receive at least $1.00 from SSI to qualify).

Countable resources include: Cash given directly to the beneficiary for any purpose, checking and savings accounts, stocks and bonds, vacation home, rental property, or other real estate that is not the beneficiary’s primary residence, IRA, 401(k), and other retirement assets, investment accounts, and Uniform Transfer to Minor Accounts. Providing debit cards or gift cards is usually seen as cash equivalents and should also be avoided.

SNT Trustees
The trustee role is critical. Thoughtful consideration should be given to the designation of the trustee of any SNT. Consider the potential trustee’s ability to (a) be sensitive to the beneficiary’s disabilities, (b) actively monitor any services provided, (c) aggressively advocate for all entitlements, and (d) prudently invest SNT funds. Because of the trustee’s many roles, consider appointing a professional corporate trustee, either to serve alone or to serve jointly with a family member trustee. In addition to designating an initial trustee, you’ll also want to name a successor trustee in case your first choice is unable to serve.

Family members can remain involved by serving as co-trustees or by having a trust advisory committee appointed. The trust advisory committee, which can include a parent, a lawyer, an accountant, a social worker, and even a sibling, advises the trustee with respect to distributions.

An Overview of Trustee Duties:
•Use trust funds to meet the beneficiary’s needs for goods or services not provided by government benefits, as far as possible.
•Manage and invest trust funds prudently, in accordance with the terms of the trust document and state law.
•Spend trust assets only for the beneficiary.
•Keep abreast of laws on eligibility for SSI and Medicaid, so that they don’t inadvertently jeopardize the beneficiary’s benefits.
•Keep meticulous records of all spending.
•Prepare annual reports as required by SSI and Medicaid.
•File federal and state trust tax returns.
•Understand the beneficiary's likes, dislikes, daily habits, and specific needs as well as the ability to handle money and the need for adaptive equipment.