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.
Under current Federal law, any inheritance of more than $2,000 disqualifies individuals with disabilities from most federal needs based assistance, including Supplemental Security Income (SSI) and Medicaid. Benefits from state public assistance programs may also be affected.
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.
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. You may have been advised to disinherit your child with special needs – the child who needs your help most — to protect that child’s public benefits. But these benefits rarely provide more than subsistence. And this “solution” does not allow you to help your child after you are incapacitated or gone.
When your child requires or is likely to require governmental assistance to meet their basic needs, you should consider establishing a special needs trust.
Each public benefits program has restrictions that the special needs trust must comply with in order not to jeopardize the beneficiary’s continued eligibility for public benefits. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two “safe harbors” permitting the creation of special needs trusts with a beneficiary’s own money if the trust meets certain requirements.
The first of these is called a “payback” or “(d)(4)(A)” trust, referring to the authorizing statute. “Payback” trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary’s death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary’s behalf.
Medicaid and SSI law also permits “(d)(4)(C)” or “pooled trusts.” Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual special needs trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary his- or herself. In addition, at the beneficiary’s death the state does not have to be repaid for its Medicaid expenses on his or her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.
The primary advantage a Special Needs Trust offers over a direct gift or inheritance is that, if arranged properly, the assets in the trust do not actually belong to the beneficiary. In this way, the trust can provide benefits to an individual but not cause the individual who has a disability to be disqualified from government programs.
A Special Needs Trust holds title to property for the benefit of a child or adult who has a disability. The Special Needs Trust can be used to provide for the needs of a person with a disability and to supplement benefits received from various governmental assistance programs.
A trust can hold cash, stocks, personal property, and real property. It can own and/or be the beneficiary of life insurance. Special Needs Trusts also can be used to protect personal injury settlements or judgments from jeopardizing government benefit eligibility. Most importantly, Special Needs Trusts can help parents coordinate their estate plans and provide peace of mind that their child will be provided for.
Special needs trusts are designed to supplement, not replace, the kind of basic support provided by government programs like Medicaid and Supplemental Security Income (SSI). Special needs trusts pay for comforts and luxuries — “special needs” — that could not be paid for by public assistance funds.
This means that if money from the trust is used for food or shelter costs on a regular basis or distributed directly to the beneficiary, such payments will count as income to the beneficiary. This can affect eligibility for government benefits like Medicaid and SSI. One of the trustee’s most important jobs is to use discretion in making distributions from the trust so as not to jeopardize the beneficiary’s eligibility for these government benefits.
If the beneficiary receives SSI, here are some basic expenses that should not be paid through a special needs trust without consultation with a special needs attorney.
Cash given directly to the beneficiary for any purpose
Food or groceries
Restaurant meals (except if given as an occasional gift)
Rent or mortgage payments
Homeowners or condo association dues
Homeowners insurance if the insurance is a mortgage requirement
Utilities such as electricity, gas, and water
Utilities hookup or connection charges
However, many of these payments will only cause a one-third reduction in SSI benefits. The trustee may determine that the benefit of the trust making these payments far outweighs the loss of income.
Under current Federal law, any inheritance of more than $2,000 disqualifies individuals with disabilities from most federal needs based assistance, including Supplemental Security Income (SSI) and Medicaid. Benefits from state public assistance programs may also be affected. Of course this law varies from State to State, so it wouldn’t hurt to read more about this and other personal financing concerns on website’s specializing on trust funds. Here are some more info pertaining to trusts.
Income paid from a special needs trust to a beneficiary will reduce SSI benefits by one dollar for every dollar paid to him or her directly. In addition, payments by the trust to the beneficiary for food or housing are considered “in kind” income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such “in kind” income. Some attorneys draft the trusts to limit the trustee’s discretion to make such payments. Others do not limit the trustee’s discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future. The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.
Choosing a trustee is one of the most important and difficult issues in special needs trusts. The trustee must have the necessary expertise to manage the trust, including making proper investments, paying bills, keeping accounts, and preparing tax returns. A professional trustee will have these skills, but may be unfamiliar with the beneficiary and his unique needs. For those who may be uncomfortable with the idea of an outsider managing a loved one’s affairs, it is possible to simultaneously appoint both a professional trustee and a family member as co-trustees. It’s also possible to hire a trust “protector,” who has the power to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may not be interested. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical.
A parent with a child with special needs should consider buying life insurance to help fund the special needs trust set up for the child’s support. What may look like a substantial sum to leave in trust today may run out after several years of paying for care that the parent had previously provided. The more resources available, the better the support that can be provided the child. And if both parents are alive, the cost of “second-to-die” insurance — payable only when the second of the two parents passes away — can be surprisingly low.
One key benefit of creating a trust now is that your extended family and friends can make gifts to the trust or include the trust in their estate planning. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low. In these cases, the special needs trust should be irrevocable rather than revocable.
It is important that special needs trusts not be unnecessarily inflexible and generic. Although an attorney with some knowledge of trusts can protect almost any trust from invalidating the child’s public benefits, an attorney without special needs experience may not customize the trust to the particular child’s needs, and the child may not receive the benefits that the parent provided when they were alive.
Another mistake attorneys without special needs experience make time and time again is putting a “pay-back” provision into the trust rather than allowing the remainder of the trust to go to others’ upon the special needs child’s death. While these “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your family hundreds of thousand of dollars, or more.
Sheri R. Abrams, Attorney at Law, can assist parents, family members or friends establish a Special Needs Trust, during their lifetime or by a Will, for a disabled person without risking that person’s eligibility for public benefits.
Sheri R. Abrams, Attorney at Law, can also establish an Special Needs Trust for the benefit of a disabled person using that person’s own funds—–without incurring a penalty period for medicaid.