PLANNING FOR INDIVIDUALS WITH SPECIAL NEEDS PART 2

by Thomas D. Begley, Jr., CELA

General

This is the second part in a five-part series dealing with planning for individuals with special needs.  Part 1 discussed the reasons to establish a trust and some of the requirements for a Special Needs Trust (SNT).  This article will focus on when to use a Self-Settled Special Needs Trust (SSSNT) and the requirements for establishing such a trust.

A distinguishing characteristic of an SSSNT is that the trust is funded with the assets of the individual beneficiary.  This type of trust is usually used in connection with a personal injury settlement, an inheritance, equitable distribution, alimony, or child support.  Generally the reasons to establish an SNT are to preserve eligibility for means-tested public benefits for the disabled beneficiary and/or to obtain expert money management.

Alternatives to Self-Settled Special Needs Trusts

There are five alternatives to SNTs:

• Spend Down.In many cases, the person with disabilities who is an SSI/Medicaid recipient has a number of opportunities to spend the money.Depending on the amount of money involved, these might include purchase of a home, home improvements, repairs or maintenance, purchase of a handicap van, clothing, household goods or personal effects, debt repayment, purchase of funeral, or legal fees.  Spend down must be reported to Social Security by the tenth day of the month following the month in which the lump sum was received.

 

• Transfer of Assets. An individual could transfer assets to a third party to remain below the $2,000 asset limit for eligibility for most means-tested public benefits.  However, transferring assets will result in a penalty for SSI and Medicaid.  Length of the penalty would depend on the amount of the assets transferred. Transfer of assets would also affect eligibility for federally-assisted housing and SNAP (food stamps). Disclaiming an inheritance constitutes a transfer of assets subject to penalty.

 

• Accept the Money. Frequently individuals, particularly unsophisticated individuals, want to accept the money and give up their benefits.  This is always an option.

 

• Pooled Trust. An alternative to establishing a standalone SSSNT would be to deposit monies in a Pooled Trust under a Self-Settled Joinder Agreement.  Pooled Trusts will be discussed further in the fourth article in this series.

 

• ABLE Account. If an individual is receiving a very small settlement, inheritance, or equitable distribution (i.e., $15,000 or less per year), that money could be placed in an ABLE account.  Frequently, spend down strategies and ABLE accounts are used in combination.  ABLE accounts will be discussed more fully in the fifth and final article in this series.

Drafting Issues

SSSNTs are authorized under 42 U.S.C. §1396p(d)(4)(A). The statute provides:  A trust containing the assets of an individual under age 65 who is disabled (as defined in §1614(a)(3)) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, a court, or the individual, if the state will receive all amounts remaining in the trust upon the death of such individual up to the amount equal to the total medical assistance paid on behalf of the individual under a state plan under this title.  Therefore, the statutory drafting issues are as follows:

• Assets of the Individual. The trust must be funded with assets of the individual beneficiary.  Assets cannot be contributed by a third party.  The grantor named in the trust document is the person whose action establish the trust, and is not necessarily the same person whose assets funded the trust.  Monies received through a personal injury action, an inheritance, alimony, or child support, or Worker’s Compensation all constitute assets of the individual.

 

• Under 65 Years of Age. An SSSNT cannot be established for an individual who has attained his or her 65^th  However, a Structured Settlement Annuity purchased prior to the beneficiary attaining age 65 can continue to pay into the trust after the individual attains age 65.

 

• The beneficiary of the trust must be disabled as defined by the Social Security Act. Many lawyers learn that a potential trust beneficiary is receiving Medicaid and immediately conclude that an SSSNT is appropriate.  Actually, individuals can receive Medicaid based on income even though they are not disabled.  An SSSNT cannot be established for an individual on Medicaid who is not disabled.

 

• For the Benefit of Such Individual. The SSSNT must be for the sole benefit of the disabled individual.  Distributions can only be made for the benefit of the individual with disabilities.  If other individuals benefit from a distribution from the trust, they must pay their pro rata share.  For example, if the trust owns the home occupied by the disabled individual and three other family members, the three other family members must pay 75% of the cost to maintain the home including real estate taxes, insurance, utilities, etc. The trust cannot be used to pay the legal obligation of support of the parents.

 

• Established By. A trust can only be established by a parent, a grandparent, a legal guardian of the individual, a court, or the individual beneficiary.  Since the individual beneficiary can establish the trust, an agent under a Power of Attorney acting on behalf of an individual beneficiary can also establish the trust.

 

• Medicaid Payback. The trust must contain a payback provision providing that the State Medicaid Agency will receive all amounts remaining in the trust upon the death of the beneficiary up to an amount equal to the total medical assistance paid.  If more than one state paid for medical assistance for the beneficiary, then all of the states must be reimbursed.  The payback must be for all medical assistance paid to the Medicaid beneficiary since birth.  Payback is not limited to the funds paid since the inception of the trust. The only deductions permitted prior to the Medicaid payback are taxes due from the trust to a federal or state government because of the death of the beneficiary arising from inclusion of the trust assets in the beneficiary’s estate, and reasonable fees for administration of the estate such as court fees, trustee fees, and legal fees.

If the trust terminated during the lifetime of the beneficiary, the early termination provision in the document must provide for the same Medicaid payback as would apply on death.  Frequently, Medicaid beneficiaries are no longer disabled and want to terminate the trust.  A significant disadvantage may be the Medicaid payback in that situation.

• The trust must be irrevocable.

 

• Spendthrift Clause. The POMS requires a spendthrift clause in the trust prohibiting both voluntary and involuntary transfers of the beneficiary’s interest in the trust income or principal. However, it should be understood that the trust does not protect the beneficiary against creditors, unless the SNT is established in a state permitting Domestic Asset Protection Trusts (DAPTs), in which event the SNT must comply not only with the federal and state SNT provisions but also with the state DAPT provisions.