SPECIAL NEEDS TRUSTS ARE JUST A TOOL
by: Begley Law Group
by Thomas D. Begley, Jr., Esquire, CELA and Emily M. Schurr, Esquire
When and How to Use a Special Needs Trust
A Special Needs Trust is best utilized when an individual is receiving public benefits or is in a position to obtain public benefits. Means-tested public benefits include Supplemental Security Income (SSI), Childhood Disability Benefits (CDB), Medicaid, Medicaid Waivers, Children’s Health Insurance Program (CHIP), and Federally Assisted Housing. “Means-tested” means that there are limits on income and/or assets. Non-means-tested public benefits include Social Security Disability Insurance (SSDI) and Medicare. The trust is only necessary when means-tested public benefits are being received or could be obtained in the future. There are two types of Special Needs Trusts.
Self-Settled Special Needs Trust
A Self-Settled Special Needs Trust can obtain only “assets of the individual.” Usually, those assets come from personal injury recoveries or inheritances. It could also include money or liquidated assets already in the name of the individual. The trust must be established by the individual, or by a parent, grandparent, guardian, or court. The trust must be irrevocable. The individual must be disabled. The Trustee cannot be the beneficiary. The trust must be established and funded prior to the individual attaining age 65, and distributions from the trust must be for the individual’s “sole benefit.” The trust is required to have a payback provision, repaying state Medicaid agencies upon the death of the beneficiary. The trust is a spendthrift trust, meaning that the trust assets are protected from liability. Transfers to the trust are not subject to a Medicaid transfer of asset penalty. Funds held in a properly drafted and administered Special Needs Trust are a non-countable asset for purposes of eligibility for asset-based public benefits, such as SSI and Medicaid.
Third-Party Special Needs Trust
A Third-Party Special Needs Trust is established and funded with assets of someone other than the disabled beneficiary, such as a relative or family friend. Typically, the parents establish this trust with their money. If the parent leaves the money directly to the Third-Party Special Needs Trust, it is the parent’s money. Conversely, if the parent leaves the money to outright to the child with disabilities, the money is considered the asset of that child and a Self-Settled Special Needs Trust is required. The assets in the Third-Party Special Needs Trust are protected from creditor claims of the trust but are not shielded from liability of the grantor of the trust. So, in other words, if the grantor had an outstanding claim at the time of trust funding, that claim would not be protected by the trust. Notably, there is no Medicaid payback upon the death of the beneficiary of a Third-Party Special Needs Trust.
Life Care Plan
The Life Care Plan, Immediate Cash Needs Form, and Monthly Budget are important planning tools related to the trust. As an example, let’s imagine a family that has three children. Two are healthy and working, and one has a disability and is unable to work. The parents love the children equally and want to leave everyone equal one-third shares. However, in order to provide the child with disabilities the lifestyle outlined in the Life Care Plan, they realize as they are preparing the Budget that they may have to allocate more to the Third-Party Special Needs Trust and less to the healthy children. For example, 80% to the trust and 10% to each healthy child may be required. The allocation will vary with family circumstances.
Who Should Serve as Trustee?
The natural inclination of the person establishing the trust is to select a family member or friend to serve as trustee. However, this is not always a good idea. The trustee has certain duties that must be followed. For example, they must make investments in accordance with the Prudent Investor Act. They must make distributions in accordance with federal and state law. If the trustee does not follow the Prudent Investor Act and/or makes improper distributions, the trustee can be liable. Once family members and friends understand this, they generally do not want to serve as trustee. In fact, many corporate trustees and banks which previously served as trustees of Special Needs Trusts are no longer willing to take on this responsibility due to the potential liability. However, there are still many disability organizations and trust companies willing to serve as trustee, which leaves family and friends unburdened and able to support their loved one in many other ways.