Special Needs Trusts: Providing Future Support for Your Loved Ones with Special Needs
Posted On: June 29th 2017
Special Needs Trusts: Providing Future Support for Your Loved Ones with Special Needs
The first few months (or even years) after receiving a diagnosis of a physical and/or mental disability can be overwhelming and filled with many unexpected questions and challenges. Your instincts are to provide whatever immediate needs your loved one requires at that moment to help him or her along, such as education, therapies, healthcare, etc. Many times planning for your loved one’s future after you’re gone is the last thing on your mind. However, while providing for your loved one’s immediate special needs can certainly take priority, providing for his or her future needs is just as important. One way to provide for your loved one’s special needs after you’ve passed is the establishment of a “special needs trust” or “SNT” (also known as a “supplemental needs trust”).
A special needs trust is an effective legal device which holds property/assets and provides financial support for the benefit of a disabled person, without the assets being counted as the property of the disabled person. Establishing a SNT is especially important if your loved one receives “needs-based” governmental benefits, such as Medi-Cal and/or SSI benefits, as the “resource limits” of these programs prohibit a recipient from possessing a certain amount of countable personal assets (in 2017, the limit is $2,000 for an individual and $3,000 for a couple) and income for eligibility purposes. Countable personal assets are cash or other liquid assets or any real or personal property that he or she owns that could be converted to cash and used for his or her support and maintenance. Items that are excluded under this resource limit are: the individual’s personal residence, one vehicle, furniture, clothing, personal effects, and other specific assets. Income considered when determining the SSI benefit amount includes both earned and unearned income. There are several different types of income and they are all treated slightly differently when it comes to SSI. To put it in the simplest of terms, if the income or other assistance can be converted into food or shelter, SSI will count it as income and either reduce the recipient’s monthly SSI benefit or eliminate it completely.
SSI is a federal “needs-based” assistance program that provides a guaranteed income to persons with limited income and resources, who are blind or disabled. A person is “disabled” if he or she is “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.” [42 U.S.C. §1382c(a)(3)(A).] Qualifying for SSI is very important for a person with special needs because if an individual qualifies for SSI, then he or she will usually automatically qualify for various other government benefit programs, such as Medi-Cal (California’s Medicaid program). Medi-Cal provides for hospitalization, treatment in medical clinics, doctors’ services, lab tests, X-rays, home health care, nursing home care, and other related medical services. It also pays for community mental health and drug abuse services and intermediate care facilities for the developmentally disabled.
Assets in a properly drafted SNT can provide supplemental benefits to your loved one which pay for goods and services not paid for by Medi-Cal and/or SSI, while he or she continues receiving Medi-Cal and/or SSI benefits, because the assets within the trust do not count against the resource limits of the programs. Without an SNT, the receipt of an inheritance and/or gift may cause an SSI and/or Medi-Cal recipient to receive less or even lose his or her benefits altogether. The most important keys to an SNT (and what is required in order to not affect the receipt of the beneficiary’s SSI and/or Medi-Cal benefits) are that: (1) the beneficiary has no power to revoke the trust and/or to direct the use of the assets contained in the trust for his or her own support or maintenance; and (2) that the money cannot be used for housing and/or food, which are considered “basic needs” under Social Security laws, and therefore are supposed to be funded by SSI benefits. The SNT exists only to pay expenses outside of the “basic needs” provided by the government benefits.
Another thing to keep in mind is that the trust document should make clear that its intent is that the trust assets will supplement (not supplant or diminish) any governmental benefits to which the beneficiary may be entitled. The trust document should clearly set forth language that the Special Needs Trust is not intended to be a basic support trust, otherwise the beneficiary’s governmental benefits may be reduced and/or eliminated altogether. This is why it is extremely important to seek the advice of an experienced attorney when drafting a SNT.
There are three types of SNTs: First Party SNTs, Third Party SNTs and Pooled SNTs.
First Party SNT [42 U.S.C. §1396p(d)(4)(A)]
A First Party SNT (also known as a self-settled or “payback” special needs trust) is a trust established for the benefit of the special needs beneficiary and funded with the property and/or assets belonging to that beneficiary. There are certain federal statutory requirements for a first party SNT: (1) The trust must be established by the beneficiary, his or her parent, grandparent, or legal guardian/conservator, or by a court; (2) The beneficiary meets the SSI definition of “disabled” (i.e. “unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months); (3) The SNT is irrevocable and is for the sole benefit of the beneficiary; and (4) The beneficiary is under age 65 when the SNT is established and funded.
First party SNTs are particularly useful for a special needs beneficiary who has received a “windfall” of property and/or assets acquired through litigation awards, inheritance, retirement plans, life insurance policy, divorce settlements, etc. Instead of the beneficiary owning the property outright, which would affect his or her eligibility for government benefits, the property and/or assets are held in a first party trust for the benefit of the beneficiary. However, while SNTs are designed to shelter the beneficiary’s property in order to meet governmental program eligibility requirements, these types of SNTs are generally subject to “payback” rules (or Medi-Cal Estate Recovery) which require that the state be reimbursed for medical expenses paid by Medi-Cal during the life of the beneficiary after he or she passes on. Because the property and/or assets held by the trust technically belongs to the beneficiary, the law provides that the state is entitled to a reimbursement for the medical expenses paid throughout the life of the beneficiary. While these SNTs do require a “payback” on the back-end, they still provide the beneficiary with his or her governmental benefits during life, along with his or her “supplemental” benefits paid through the SNT. First party SNTs are active immediately upon funding and require language which includes this “payback” provision. There are also some tax implications associated with a first party SNT, therefore you should always consult with a tax professional prior to establishing such a trust.
Third Party SNT
A Third Party SNT is a trust established for the benefit of a special needs beneficiary but is funded with the property and/or assets belonging to a third party. These are, by far, the most common type of SNT. Commonly, family members create a SNT for a loved one with special needs by leaving property and/or assets in the SNT through their own estate plan (their trust, will, life insurance, or other beneficiary designation). Third party SNTs can pay for services required by the beneficiary, such as telephone, education, car repairs, etc., without affecting the beneficiary’s governmental benefit eligibility. However, the trustee would not make cash payments directly to the beneficiary because those payments would be counted as income for the beneficiary and could result in a reduction or elimination of governmental benefits.
In addition to the difference in the source of funding, Third Party SNTs also differ from First Party SNTs in the following ways: (1) there is no “payback” requirement for third party SNTs, as there is for first party SNTs; (2) there is no particular definition of “disability”; and (3) there is no age limitation on the beneficiary. Third party SNTs can be created (and funded) either during the lifetime of the grantor in a living or inter vivos trust; or, after death, by directing its creation in his or her will. If the SNT is created during the grantor’s life, it becomes effective immediately and anyone (except for the SNT beneficiary) can give money to the trust by either writing a check or including the SNT as a beneficiary in their will.
Pooled SNT [42 U.S.C. §1396p(d)(4)(C)]
A Pooled SNT is a trust established and run by a non-profit organization. Accounts for pooled SNTs may be either first party or third party. These types of trusts are useful when you do not have a qualified or willing person to act as trustee of the SNT. A pooled SNT is managed by a non-profit Trustee and the assets are combined and invested together but accounted for separately for each beneficiary by the trustee. Funds are spent on beneficiaries in proportion to their share of the total amount. If there are any funds remaining in a first party pooled trust after the death of the beneficiary, the remaining funds are subject to the “payback” rules set forth above, unless it has been directed that those funds are to be paid to the non-profit organization to assist it in accomplishing its charitable mission. If there are any funds remaining in a third party pooled trust after the death of the beneficiary, those funds are paid to the non-profit organization to assist it in accomplishing its charitable mission. Therefore, pooled SNTs are especially appropriate when the beneficiary and/or his or her family has a strong desire to benefit the non-profit organization.