Special Needs Trusts
Special needs trusts (also known as "supplemental needs" trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining eligibility for public benefits.
As their name implies, special needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing, and shelter if the trustee decides doing so is in the beneficiary's best interest despite a possible loss or reduction in public assistance.) Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (such a specially equipped vans), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses.
Often, special needs trusts are created by a parent or other family member for a child with special needs (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These "self-settled" trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.
Planning for Disabled Children
A Short Introduction to Special Needs Planning For Children
Estate planning by parents who have children with disabilities involves many challenges, including the following:
• How do you leave funds for the benefit of the child without causing the child to lose important public benefits?
• How do you make sure that the funds are well managed?
• How do you make sure that your other children are not over-burdened with caring for the disabled sibling, and that any burdens fall relatively evenly among the siblings?
• What is fair in terms of distributing your estate between your disabled child and your other children?
• How do you make sure there’s enough money to meet your disabled child’s needs?
Often, parents of children with special needs try to resolve these issues by leaving their estates to their other children, leaving nothing to the disabled children. They have a number of reasons for this approach: The disabled child shouldn’t receive anything because she can’t manage money and would lose her benefits. She doesn’t need any inheritance because she will be taken care of by the public benefits she receives. The other children will take care of their sister.
This approach is to be discouraged for a number of reasons. First, public benefits programs are often inadequate. They need to be supplemented with other resources. Second, both public benefits programs and individual circumstances change over time. What’s working today, may not work tomorrow. Other resources need to be available, just in case. Third, relying on one’s other children to take care of their siblings places an undue burden on them and can strain relations between them. It makes it unclear whether inherited money belongs to the healthy child to spend as he pleases, or whether he must set it aside for his disabled sister. If one child sets money aside, and the other doesn’t, resentments can build that may split the family forever.
The better answer to many of these questions is a “Special Needs Trust.” Such trusts fulfill two primary functions: The first is to manage funds for someone who may not be able to do so himself or herself due to disability. The second is to preserve the beneficiary’s eligibility for public benefits, whether that be Medicaid, Supplemental Security Income (SSI), public housing, or any other program. They come into play in a multitude of situations, including parents planning for a disabled child, a disabled individual coming into an inheritance or winning or settling a personal injury claim, or one spouse planning for a disabled spouse.
First, a short explanation of what trusts are and how they work: A trust is a form of ownership of property, whether real estate or investments, where one person – the trustee – manages such property for the benefit of someone else – the beneficiary. The trustee must follow the instructions laid out in the trust agreement as to how to spend the trust funds on the beneficiary’s behalf – whether and when to distribute the trust income and principal. In general, trusts fall into two main categories: self-settled trusts that the beneficiary creates for himself with his own money and third-party trusts that one person creates and funds for the benefit of someone else.
Each situation and each benefit program has its own rules which affect the drafting, funding and administration of special needs trusts. The public benefit programs in many ways track the treatment of trusts in terms of creditor protection. Just as you generally cannot create a trust for your own benefit and protect the trust funds from creditors, you usually cannot create a trust for your own benefit and have the funds uncountable for purposes of Medicaid, SSI and other public benefits programs.
However, Medicaid and SSI have provided for “safe harbors” that permit the creation of self-settled supplemental needs trusts in certain circumstances. These are often referred to as (d)(4)(A) or "payback" trusts referring to the enabling statute and the requirement that at the death of the beneficiary the state be paid back its Medicaid expenditures on her behalf to the extent sufficient funds remain in the trust.
So-called "third-party" special needs trusts are usually created by parents and grandparents for the benefit of children and grandchildren with disabilities. These can be much more liberal than the statutory self-settled special needs trust and do not need to include a payback provision.
For more information about special needs planning in general and special needs trusts in particular, contact my office today.
What Is a "Payback" Special Needs Trust and When Is It Useful?
What Is a First-Party or "Payback" SNT?
Like a third-party SNT, the first-party trust is designed to benefit individuals with special needs who qualify - or expect to one day require - public benefits that are available only to people with limited resources. Both third- and first-party SNTs allow assets to be set aside for "supplemental" expenses not covered by SSI or other resources. For example, a trustee can distribute SNT funds to pay for education expenses, a vacation or hobbies, but not for food or shelter, which are covered by SSI.
What differentiates a first-party SNT is the following:
The trust must be established by a parent, grandparent, guardian or the court.
The trust must be "irrevocable," that is, unchangeable.
The beneficiary's assets must be used to fund the trust.
The beneficiary must be under age 65 at the time the trust is established.
At the beneficiary's death, the state Medicaid agency must be reimbursed.
When Is a First-Party SNT Appropriate?
A first-party SNT may be desirable when an individual with special needs has assets - or expects to receive assets - that would disqualify him or her from eligibility for public benefits. Some examples include:
An inheritance. Receiving an inheritance can cause a person with special needs to lose public benefits. That outcome may be prevented by placing the inherited assets in a first-party SNT.
A settlement from a lawsuit. A first-party SNT can allow an individual to receive an award in a personal injury or medical malpractice case without losing eligibility for public benefits. Settlements often comprise a lump-sum payment and an annuity. Both types of payment can be directed to a first-party SNT established by the court.
Because each situation is unique, it is important to discuss the best alternative with a knowledgeable special needs attorney.