23 May 2022

Special Needs Trust Planning

What is a Special Needs Trust?

A Special Needs Trust provides financial assistance to a person with a disability without interfering with essential governmental benefits like Supplemental Security Income (SSI), Community Mental Health, and Medicaid.  Some individuals with disabilities have private health insurance and other sources of support, but many rely on means-tested governmental benefit programs to provide health care coverage.  Many disabled individuals need access to specialized services available almost exclusively to those eligible for means-tested benefits.  Government programs provide minimal financial support and may not cover even basic necessities. Family members often supplement the services and supports provided.  Parents, grandparents and others often want to continue to support their loved one as part of their estate plan. Special needs trust planning is essential for these families to provide ongoing benefits to their loved one with a disability, without causing that loved one to lose means-tested benefits.  A Special Needs Trust can also provide management for a person who isn’t legally disabled but who is functionally disabled by emotional, mental or physical problems.

A Special Needs Trust generally gives the trustee broad discretion regarding distributions for the benefit of the person with a disability.  Discretion is key element of the Special Needs Trust.  The trustee has the authority to make distributions, but nobody, including the beneficiary or the government, can compel the trustee to make distributions.  Discretionary trusts provide other benefits.  First, it is important to remember that a beneficiary’s needs change over time. Even if means-tested benefits are not currently necessary, they may become necessary or desirable if circumstances change.  Second, the trustee’s broad discretion provides flexibility to address complex needs or situations. Additionally, discretionary trusts help minimize exposure to creditors and predators and protect a beneficiary from his or her own bad judgment.  A pure discretionary trust helps provide management for a beneficiary who is not receiving means-tested benefits, but who needs assistance and support in money management.

What Can a Special Needs Trust Pay For?

Contrary to common belief, unless the trust provides otherwise, a Special Needs Trust can be used to pay for food, housing, medical care, and other basic support needs, in addition to expenditures for quality of life or amenities.  However, if the beneficiary receives SSI, payments for food and shelter may result in a reduction of the SSI payment amount.  A Special Needs Trust generally can’t provide a monthly allowance, stipend, or cash payment to beneficiary because this will be treated as countable income for governmental benefit programs.

Generally, distributions from a Special Needs Trust are made directly to providers of goods and services.  For example, if the beneficiary needs money to buy a couch, the trustee will make a payment directly to the furniture store. If the beneficiary needs a therapy, medication, or other care not covered by Medicaid, the trustee pays the therapist, pharmacy, or care provider. This allows the beneficiary to use their own income (from SSI, Social Security Disability, or Veterans benefits) for their cash spending needs while the trustee pays for their fixed expenses.  In addition to paying for basic needs not adequately covered by governmental programs, the trustee can make distributions that are essential to the beneficiary’s qualify of life.  Examples of distributions might include payment for concert tickets, expenses of pet, purchasing and maintaining a vehicle, internet or cell phone, lawn care, appliances, clothing, or a health club membership.

A special needs trust with discretionary distribution provisions may be appropriate even if means-tested governmental benefits are not involved.  For example. a disabled beneficiary with a large special needs trust may be able to purchase higher quality, less restrictive services and access to care by paying privately instead of maximizing governmental benefits.  Whether or not government benefits are involved, the trustee can use trust funds to purchase assistance from professionals or to pay family members to provide social support or care.  A family member or professional advocate can meet with the beneficiary on a regular basis to ensure that the individual has proper health care, living arrangements, recreational opportunities, and other quality of life goods and services.

What is the Difference Between a First-Party Special Needs Trust and a Third-Party Special Needs Trust?

There are two types of special needs trusts:  a “first-party” special needs trust and a “third-party” special needs trust.  The key question is “whose money is going into the trust?”  A first-party special needs trust is funded by assets owned by the person with a disability.  A third-party special needs trust is funded with assets from a third party, usually parents or grandparents.

First-Party Special Needs Trust.  A personal injury settlement, a Social Security back payment, or an outright gift or inheritance can cause a person with a disability to lose means-tested government benefits.  Once a person with a disability has a right to receive an asset, it is considered available for purposes of eligibility.  State and federal law allow a person with a disability to transfer excess assets to a first-party special needs trust which meets special standards.  Assets transferred to these first-party trusts are not counted towards governmental benefit eligibility and the transfer is not subject to a divestment penalty. First-party trusts are more highly regulated and more closely scrutinized by governmental benefit agencies that third-party special needs trusts. There are two basic types of first-party special needs trusts.

A “Medicaid Payback Trust,” is sometimes called an “Exception A Trust” or a “d4a Trust” because of the section of the federal law that authorizes it.  The trust can be established by a mentally competent disabled person, a court, guardian, parent or grandparent.  If the trust is established by a court, the court may continue to supervise distributions from the trust. The trust must be for the sole benefit of a disabled person under age 65.  The trustee can distribute assets from the trust directly to providers of goods and services for the sole benefit of the person whose money funded the trust. Distributions can be made for almost any purposes, including food and shelter expenses.  However, if the beneficiary is receiving SSI, distributions for food and shelter may reduce the SSI payment.  If funds remain at the beneficiary’s death, those funds must first be used to repay any state which provided Medicaid benefits to the beneficiary throughout the beneficiary’s life.  The Medicaid payback has priority over almost all other expenses, even the beneficiary’s funeral expenses.  The trust can, however, purchase prepaid funeral arrangements while the beneficiary is alive.

A “Pooled Trust,” sometimes known as an “Exception B Trust,” is established by a non-profit who administers a master trust, meeting all applicable requirements.  A competent person with a disability, or a court, guardian, parent or grandparent, can establish a separate account in the Pooled Trust.  The non-profit trustee of the Pooled Trust distributes funds directly to the providers of goods and services for the sole benefit of the beneficiary whose money funded the account.  When the beneficiary dies, the remainder generally passes to the non-profit.  Any portions not passing to the non-profit are subject to the same Medicaid lien as the Medicaid Payback Trust.

Third-Party Special Needs Trust.  A third-party special needs trust allows a third party like a parent or grandparent to set aside resources for a disabled loved one without interfering with governmental benefits.  These trusts typically hold gifted or inherited assets for the benefit of a disabled loved one.  A third-party special needs trust cannot contain any funds of the person with a disability.  Property in a properly drafted third-party special needs trust is not considered a countable asset for SSI, Medicaid or other benefit programs.

The special needs trust provides continued assistance to the disabled person to help maintain his or her quality of life, meet basic needs or pay for medical services not covered by Medicaid. Unlike a first-party special needs trust, Medicaid does not place a lien or any other reimbursement requirement on a third-party special needs trust after the death of the beneficiary.  Any assets remaining in the Third Party Special Needs Trust after the person with a disability passes away can be distributed to his or her family members or for charitable purposes, according to the terms of the trust.

A third-party special needs trust may be created as part of a family member’s will or trust.  It can also be a stand-alone document.   Other friends or relatives may also contribute to a stand-alone special needs trust.  Governmental benefit agencies sometimes have an easier time understanding the structure of a stand-alone special needs trust as opposed to a trust created at a family member’s death.  The family must be sure, however, to coordinate their estate plans with the stand-alone third-party special needs trust so that any benefits for the person with a disability go to the special needs trust and not directly to the person with a disability .

How Do I Create a Special Needs Trust?

A special needs trust is a crucial part of your estate plan if you or someone you love have a disability. The special needs trust rules allow additional resources to be used to provide the highest possible quality of life for a person with a disability.  It can be written so that it can adjust easily to changes in the law or in the beneficiary’s needs.  You can contact your Miller Johnson estate planning professional for more information about this important tool.