ADMINISTRATION OF A SPECIAL NEEDS TRUST

by Thomas D. Begley, Jr., Esquire, CELA

PRELIMINARY MATTERS

            Administration of a Special Needs Trust is complex.  It is critical that distributions be made in such a manner that the beneficiary maintains public benefits.  The trustee must be aware of the rules pertaining to each public benefit program to which the beneficiary is entitled or may become entitled.  These benefits are typically Supplemental Security Income (SSI), Medicaid, SNAP (Food Stamps), Energy Assistance, Section 8 Housing, and other public benefits.  In addition to knowledge of public benefits law, the trustee must understand the Prudent Investor Act, the Principal and Income Act, Trustee’s Duties under state trust law, and must understand the nature of the beneficiary’s disability and the needs of the beneficiary and his family.  Assets in a properly-drafted Special Needs Trust are non-countable as resources. The issue is whether distributions are considered income to the beneficiary that will reduce or eliminate public benefits. While the trust should not be a “parking lot” for assets, it is also important to consider whether the assets in the trust will last for the lifetime of the disabled beneficiary at a given level of expenditure.

Counseling Session

            Prior to the trust being funded, a counseling session should take place with the person with a disability, interested family members, the trustee, and the attorney preparing the trust document.  The expectations of the family members and the individual with disabilities should be articulated and limits on the powers of the trustee should be clearly set forth, particularly with respect to what types of distributions are appropriate.  Public benefits laws are complicated and change rapidly.  In order to avoid constant conflict throughout the administration of the trust, it is useful at the outset, to carefully review what can be done by the trustee in relation to the expectations of the family and the person with disabilities.  A Life Plan should be developed outlining the hopes and dreams of the individual with disabilities and the intention of other family members.

            The disabled beneficiary and family should determine how long the person with disabilities is likely to live and how many years the trust should last.  Once this determination has been made, the family might prepare a proposed budget showing the anticipated expenses for which distributions can be made.  Reference should be made to the Life Plan where appropriate.  These items can be specifically reviewed in the counseling session, and a determination can be made as to which distributions are appropriate and which are not.  This exercise begins the process of managing everyone’s expectations with respect to distributions.

            In reviewing the budget and proposed distributions, begin by identifying any immediate cash needs.  The person with a disability may need a residence, a handicap van, a vacation, furniture, a funeral or funds to repay outstanding debt. Then, by utilizing the budget form, determine each item of expenditure with a monthly estimate as to cost and determine whether the expenditure will be paid by the trust or by the beneficiary.  A credit card or debit card makes the administration of the trust easier for all concerned.

            Involving the person with a disability in the preparation of the budget is extremely useful.  If the trustee attempts to impose its will on the budget process, there will be resentment on the part of the person with a disability and administration of the trust will become contentious.  Better practice is to let the person with a disability develop the budget and then show him or her that the funds will not last at the proposed level of expenditure.  Let the person with a disability then revise the budget.  Participation by the person with a disability will achieve “buy-in” and the process of administering the trust will be much less contentious.

            If the Special Needs Trust is an SSSNT, it must comply with the requirements of the State Medicaid Agency and the SSA POMS.  The State Medicaid Agency may attempt to impose requirements that are stricter than those of the SSI program.  Typically, there are several requirements that must be understood by the trustee and the family.  Families of persons with disabilities often feel that the trust fund is a family bank account, and distributions to family members may disqualify the person with a disability from public benefits.

•            Sole Benefit Of.  Generally, a trust must be for the sole benefit of the person with a disability.  Distributions from the trust must be limited to those that benefit the person with a disability.
• Pro Rata Share.  If a trust makes distributions that incidentally benefit other persons, those persons must contribute a pro rata share.  For example, if the trust buys a home for a disabled adult beneficiary and the parents of the disabled adult beneficiary reside in the home, then they must pay their pro rata share of the expenses of maintaining the home.
• Legal Obligation of Support.  Parents may not be relieved of their duty to support their minor children, if they are capable of doing so.  In many states, a parent’s legal obligation of support extends beyond minority if the child is disabled.  The funds in the trust may not be expended on routine support, unless the parent’s income is insufficient.  In most third-party trust situations, the trust may not be funded until the parent’s death.
• Accounting.  Generally, an accounting is required to the State Medicaid Agency and/on Social Security on an annual basis.
• Distribution Caps.  Some states have caps on expenditures from a Special Needs Trust.  Often, the State Medicaid Agency must be notified in advance of making a distribution in excess of the cap.  In New Jersey, the cap is $5,000.00.

Titling of Trust Assets/SSSNTs

            In some states, such as New Jersey, assets purchased with funds from an SSSNT must be titled in the name of the trust and never in the name of the beneficiary.  It is often possible in a personal injury recovery to obtain an allocation to other family members to purchase the home in their name.

TYPES OF DISTRIBUTIONS

            The rules of administration apply to both Third Party Special Needs Trusts and SSSNT.  In order to be effective, a special needs trust needs to be carefully drafted and carefully administered.  Improper administration can cost the beneficiary his public benefits and may result in a lawsuit against the trustee.

            If the beneficiary is an SSI recipient, a direct distribution to the beneficiary will reduce the SSI payment dollar-for-dollar.  As long as the beneficiary has $1 of SSI remaining, he will be eligible for Medicaid.  If the SSI payment is completely eliminated, Medicaid will be lost.  It is particularly critical to avoid making direct distributions to the beneficiary where he is receiving both SSI and Social Security Disability Insurance (SSDI).  An SSDI recipient who receives a monthly benefit less than the SSI payment is also eligible for an SSI payment to bring the total monthly amount up to the SSI maximum.  These people are called dual recipients.  For example, the Federal SSI payment for calendar year 2026 is $994 per month for an individual and $1,491 per month for a married couple.  If a person was entitled to SSDI in the amount of $600 per month, they would also be entitled to an SSI payment in the amount of $394 per month.  A direct distribution of $400 per month from the trust would eliminate the SSI payment and cause a loss of Medicaid.  A distribution for ISM could cause a one-third reduction or a one-third plus $20 reduction and, again, would eliminate the SSI payment causing a loss of Medicaid.

Examples of Permissible Trust Distributions/SSI Recipients

            Examples of permissible trust distributions from a trust established for the benefit of an SSI recipient:

•         Home purchase, with rent paid by occupants
•         Home improvements, repairs, and maintenance by outside source
•         Tools to perform home improvements, repairs, and maintenance by homeowner
•         Installation of burglar alarm or monitoring/response system in home
•         School tuition, books, and supplies
•         Health and life insurance premiums
•         Entertainment purposes, including books and magazines; trips to movies, plays, museums, and sporting events; audio/video equipment; hobby supplies, etc.
•         Purchase and maintenance of car, or bus passes
•         Household goods and other items of personal property of reasonable value
•         Food
•         Clothing
•         Payment for items such as cleaning supplies and paper products
•         Telephone expenses
•         Dental care, physical therapy, massages, support services, and other medical costs not covered by any benefit programs
•         Home care services not covered by another program
•         Durable medical equipment, such as wheelchairs
•         Gifts of limited amounts to family members (under certain circumstances)

ISM

            If a trustee provides in-kind support and maintenance that is shelter, then SSI benefits may be reduced.  Depending on the household in which the individual resides, the benefit may either be reduced by the actual value or the presumed maximum value.  A beneficiary can always show that the actual value is less than the presumed market value.  If the actual value exceeds the presumed market value, then the benefit is only reduced by the presumed market value.

            While such distributions may have the negative consequence of reducing the trust beneficiary’s SSI payment, there is nothing in the federal statute to preclude the use of trust funds for shelter.  New Jersey considers distributions for shelter from an SSSNT to be income to the beneficiary for purposes of Medicaid eligibility.