Charles Scott, Esq.
Special Needs Trusts are designed to provide a source of funds to use for the needs of disabled persons without disqualifying them from necessary government benefits they are receiving, such as SSI. An SSI beneficiary receives support from the government because the beneficiary is aged, blind, or disabled, and his or her assets and income are low enough to meet a “means test.” SSI payments are relatively low, and are intended to pay primarily only for the beneficiary’s food and shelter. There are typically other needs that cannot be met easily without funds from other sources. However, any direct cash or rent payments, or many other distributions of funds to someone on these programs, may disqualify them from the programs or reduce their benefits. In order to provide for these other legitimate needs, it is usually advisable to set up what is known as a Special Needs Trust. These types of trusts are administered by a third party (the “Trustee”) for the person’s benefit, to be used as a supplement to the public. That is why the trust is called a “Special Needs Trust.” The Trustee can be a family member or third party professional, but cannot be the disabled person.
Administering a Special Needs Trust can be tricky, because the eligibility rules for public benefits are complicated, easily violated and subject to change. If the Trustee doesn’t satisfy these rules, it may cause the loss or reduction of the public benefits.
There are two categories of Special Needs Trusts: ones set up with the person’s own money, and ones set up by third parties, such as families or friends. If you have family members that you want to provide for who are on needs-based public assistance, you need to make sure that your Trust contains the right provisions to do that, without jeopardizing their benefits. These should be drafted by a professional who is familiar with these types of Trusts.
In general, money left in a Special Needs Trust for the benefit of someone receiving needs-based public assistance, coming from a third party such as a parent or relative, that never is actually received by the person on assistance, is considered a “third party” Special Needs Trust, as opposed to a Trust that contains assets that the beneficiary already has or is receiving directly, such as a lawsuit settlement, the person’s wages, or a direct inheritance where it was not set up as a Special Needs Trust.
There are actually few rules governing third-party Special Needs Trusts. If the beneficiary never becomes legally entitled to demand or receive the money in the Trust, except as the Trustee determines is appropriate, it normally should not affect program eligibility. The most important rule is simple: the Trust terms should not create any entitlement to demand or automatically receive either income or principal. If the Trustee has complete discretion on whether to make distributions for the beneficiary, the Trust principal and income will usually not be counted as available for program eligibility purposes.
Sometimes a public benefits recipient may become entitled to receive assets that would prevent continued eligibility for benefits, such as a direct inheritance, gift, or litigation settlement. Under many program rules, he or she cannot simply turn it down, or direct it to someone else, without affecting eligibility. For those situations, it may be possible and advisable to place the assets into a “self-settled” or “First Party” Special Needs Trust, in order to keep eligibility for government benefits. These Trusts are more complicated, and again require professional assistance to set up properly. Sometimes, such as for substantial litigation settlements, they must be approved by and are made subject to the continuing jurisdiction of the Probate Court, which greatly complicates their administration and increases the costs associated with them. A Trust established with assets which would have belonged to an individual, or to his or her conservatorship, even if the disabled person does not personally create it, is still self-settled, regardless of who signs the Trust documents.
First Party or self-settled Special Needs Trusts are much more complicated than their third-party equivalents. Usually (but not always), a self-settled Special Needs Trust must include a provision repaying state Medicaid agencies, payable at the death of the beneficiary. Such a provision is often called a “pay-back” provision.
Normally, only self-settled Special Needs Trusts require a provision repaying the state for Medicaid benefits. Third-party Special Needs Trusts (those established by with someone else’s assets for the benefit of a different person with a disability) should normally not include any provision for repayment of government expenditures. Instead, if there is any money left in a third-party trust when the disabled person dies, it can go to other children or relatives, rather than to the government.
There may be other options worth considering for relatively small amounts of funds, such as a “pooled” Special Needs Trust set up by a nonprofit agency to handle distributions for many beneficiaries on assistance, at a lower administrative cost due to spreading the overhead, or by having the person on assistance set up an account under the relatively new “ABLE Act” that allows small amounts (up to about $13,000 per year with maximum total amount) to be set up in government-supervised accounts, still with “pay-back” provisions, that can be used to pay for supplemental needs.
Whatever you decide, Kimball, Tirey & St. John LLP’s estate planning attorneys can help you to identify and implement your best estate planning at an affordable price. If you have questions regarding this article, please contact Charles Scott at (800)574-5587 or firstname.lastname@example.org.
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