by: Begley Law Group

by Thomas D. Begley, Jr., CELA


According to Annual Disability Statistics Compendium published by the federal government, in 2014 there were 39,674,679 individuals with disabilities living in the community, a prevalence rate of 12.6%. This number is increasing as disabilities, such as Autism and Alzheimer’s Disease, become more prevalent. Non-institutionalized civilians with disabilities age 18 to 64 had the following characteristics:

  • Approximately 13% lived in poverty
  • Approximately 34.4% were employed , compared to 75.4% without disabilities
  • Approximately 19.9% were working full-time year-round, compared to 50.7% without disabilities;
  • 4% of students received special education;
  • 6% graduated with a diploma;
  • 7% had less than a high school education, because they dropped out;
  • 9% of non-institutionalized civilian Veterans reported a service-connected disability;
  • 7% had medical insurance, compared with 83.4% of those without disabilities;
  • Of those age 21-64, 2.3 of the population had difficulty seeing; 1.9% had difficulty hearing; 6.6% had difficulty walking; 6.0% had mental disabilities; and, 16.6% of the total population had some form of disability.
  • In 2014:
  • Median earnings were $21,232 per year, compared with $31,324 for those without disabilities;
  • 805,536 individuals of all ages were SSI recipients.

Parents of children with disabilities lead a much different life than parents with children without disabilities. Upon learning that their child has a diagnosis of disability, the first reaction for many parents is denial. Denial rapidly merges with anger, which may be directed toward the medical personnel involved in providing the diagnosis; fear is another immediate response. Eventually, parents accept the situation and begin providing the care and protection their children with disabilities need. Soon, their concern shifts to what will happen to the child once the parents are gone.

There are a number of tools available for planning for individuals with special needs. This is the first of a five-part series that discusses each of these tools and compares them to one another. The tools include: Self-Settled Special Needs Trusts, Third Party Special Needs Trusts, Pooled Trusts and ABLE accounts.         Let’s begin by discussing the reasons for considering a Special Needs Trust.

Reasons to Establish a Trust

There are two primary reasons for establishing a Special Needs Trust. One is that many individuals with disabilities are unable to manage money. They do not have investment expertise and often tend to be spendthrift. A professional special needs trustee can be identified who has investment expertise and who will assist the family in developing a budget and ensure that the budget is followed and that the public benefit rules are also followed.

The second reason for establishing a Special Needs Trust is that many individuals with disabilities rely on means-tested public benefits. Generally, these programs limit the income and assets of an individual. While the tests vary from program to program, typically there is an asset limit in the neighborhood of $2,000 and income is also taken into consideration.

Means-tested public benefits include the following:

  • Supplemental Security Income (SSI)
  • Medicaid
  • Section 8 Housing
  • SNAP Benefits (Food Stamps)
  • Energy Assistance
  • Pharmaceutical Assistance
  • Group Homes
  • Traumatic Brain Injury (TBI) Programs
  • State Medicaid Waiver Programs
  • Adoption Assistance

The following benefits are not means-tested:

  • Social Security Disability Income (SSDI)
  • Medicare
  • Special Education

Distribution Standard

The goal of a Special Needs Trust is to utilize the assets in the trust for the benefit of the disabled beneficiary while not having the assets in the trust counted for eligibility purposes for means-tested benefits. The key is the distribution standard. If there are “any circumstances” under which the beneficiary can access the funds in the trust, the trust assets are available. Typical trust distribution standards are as follows:

  • Support Trusts. The monies can be used for the health, education, maintenance and support of the beneficiary, so these assets are available.
  • Purely Discretionary Trusts. Those assets can only be used for the beneficiary at the discretion of the trustee. The beneficiary cannot compel a distribution. Assets in these trusts are unavailable.
  • Discretionary Support Trusts. A Discretionary Support Trust is a hybrid between Supports Trust and a Purely Discretionary Trust. The trustee is given discretion as to whether or not to use income and/or principal for the support of the beneficiary. The question is whether the beneficiary can compel a distribution from the trust. Court cases around the country vary, so it makes little sense to utilize this type of trust in special needs planning.
  • Distributions for In-Kind Support and Maintenance (ISM). Social Security considers distributions from a trust for food and shelter to be in-kind support and maintenance. SSI is a payment from Social Security to be used for food and shelter. When a payment is made from a trust for food and shelter, the SSI payment is reduced by the amount of the distribution not to exceed one-third of the federal payment, which in 2018 is $250.
  • If income is distributed directly to the beneficiary of the trust, the income is considered in determining eligibility for public benefits. For example, the maximum federal SSI payment for 2018 is $750. New Jersey has a state supplement of $31.25. If a Special Needs Trust distributed $800 per month to the beneficiary, the $800 would be counted as income and the beneficiary would lose SSI. If the Special Needs Trust pays third parties for expenditures other than food or shelter, the income distributed is not counted as income of the beneficiary.

Trustee Provisions

Good practice dictates that a professional trustee should always be used in Special Needs Trusts. Social Security frequently changes the POMS, which govern Special Needs Trusts. Non-professional trustees do not keep up with the changes and, accordingly, administer the trust under the old rules rather than current rules causing a loss of benefits. Other programs change their rules as well, although not as frequently as Social Security.

Frequently, family members abuse their position as trustee. Parents often use money in a Special Needs Trust for a child for the parents’ own purposes or for satisfying a legal obligation to support the child. Siblings often make payments that benefit themselves and their families, rather than the beneficiary of the trust. Family members seldom have investment expertise. If an individual is a trustee of a First Party Special Needs Trust, he must be bonded unless the court rules otherwise. Bonds are expensive.

Family members are often willing to accept a professional trustee, if a family member can remove and replace that trustee. A trust protector can be named in the trust instrument and given the authority to remove and replace. It is generally not a good idea to have the beneficiary be the trust protector, but another family member, who might tend to be more objective, is a better choice.