Are you or a family member disabled and receiving government benefits or potentially needing them in the future? If the answer is yes, a special needs trust (SNT) could be an important part of your estate plan.
The receipt of an inheritance, lawsuit settlement, or gift could affect a person's eligibility for government benefits, such as SSI and Medicaid. If the money or property is instead placed in a special needs trust, trust funds can be used to provide goods and services to the beneficiary without affecting his or her benefits.
Read on to learn how SNTs work. Here are the answers to 12 questions most often asked about them.
#1. WHAT ARE SPECIAL NEEDS TRUSTS?
Special needs trusts, also called supplemental needs trusts, are designed for people with disabilities, usually to augment public benefits. People with disabilities often face expenses related to their disability, such as specialized medical care, home renovations, special transportation services and vehicles, and other expenses that are not typically covered by their public benefits. With a special needs trust, a beneficiary can retain public benefits while using funds from the trust to pay for disability-related expenses.
#2. WHO NEEDS A SPECIAL NEEDS TRUST?
Special needs trusts are usually used when a person receives needs-based public benefits, such as Medicaid or SSI. These programs limit the value of assets a recipient can have. For example, SSI limits assets to $2,000 for a single person or $3,000 for a married couple. A person who exceeds these asset limits can be disqualified from the program. He or she would then need to pay out-of-pocket for the services that would have been covered by the program (such as medical care) and would not receive any cash assistance.
Not all assets count toward the resource limits. For example, a person's homestead and one vehicle and excluded. Additionally, assets that a person does not have access to or control over are not typically counted toward this amount, which is where the special needs trust comes in play.
A person can be disqualified from receiving public benefits by an inheritance even if the person rejects the inheritance. Special needs trusts can help a loved one provide an inheritance to a beneficiary with a disability without threatening their benefits.
#3. WHAT CAN FUNDS FROM A SPECIAL NEEDS TRUST BE USED FOR?
A special needs trust can be used to pay for goods and services that are not provided to the beneficiary by public benefits, including:
• Supplemental health insurance and life insurance or burial insurance that does not exceed the exemption limit.
• Additional medical services, including physical therapy, rehabilitation, alternative treatments,
and dental services.
• Durable medical equipment, medication, home improvements, or renovations.
• Specially-equipped vans, wheelchairs and other assistive devices.
• Maintenance of the beneficiary's vehicle, automobile insurance, and fuel
• Cable television services, internet service, and newspaper subscriptions.
• Computer, mobile phone, tablet, or other electronic devices to access information.
• Household furnishings, appliances, and furniture.
• Entertainment and travel, including the cost of a companion.
• Education and training, books, and tutoring.
• Care management services.
• Professional services from accountants, lawyers, or life coaches.
• Costs to start a business.
#4. ARE THERE RESTRICTIONS ON WHAT THE TRUST BENEFICIARY CAN USE THE FUNDS FOR?
Yes. Generally, the funds should not be used to pay for expenses that the public benefits are intended to pay for, such as food, shelter, or clothing. However, trust funds can sometimes be used to pay for some of these expenses. For example, if the beneficiary does not already have a home, a home can be purchased with the trust funds since the value of one home is exempted. There may also be a time when the trustee is willing to use the funds for these basic purposes even if so doing would jeopardize the benefits, but the trustee should consult with a lawyer before taking this action.
#5. WHAT ARE THE DIFFERENT TYPES OF SPECIAL NEEDS TRUSTS?
The three main types of special needs trusts are first-party SNTs (established with assets belonging to the beneficiary), third-party SNTs (established with assets never owned by the beneficiary), and pooled trusts (managed by a non-profit organization). Each is established differently.
#6. WHAT IS A FIRST-PARTY SPECIAL NEEDS TRUST?
A first-party special needs trust uses the beneficiary's assets to fund the trust. This type of trust is also called a “self-settled” trust or a d4a trust (named for the section of the U.S. Code authorizing it, 42 U.S.C. §1396p(d)(4)(a)).
A first-party special needs trust is most often used when the special needs beneficiary receives an inheritance, a lawsuit award or settlement, or a gift or when the beneficiary owned assets before becoming disabled that would make him or her ineligible for government benefits.
A first-party special needs trust can be established by the disabled person who receives public benefits, as long as he or she is a mentally competent adult. Otherwise, the trust can be established by a court, or the beneficiary's parent, grandparent, or legal guardian.
To establish this type of trust and avoid possible Medicaid transfer penalties, the beneficiary must:
• Be under the age of 65.
• Meet the government's definition of disabled. (The definition is complicated, but people who qualify for SSI and Medicaid based on disability generally meet it.)
• Name the state as the remainder beneficiary of any funds remaining in the trust after the beneficiary's death up to the amount of medical assistance provided by the state (a “payback” provision).
At the beneficiary's passing, assets remaining in the trust are used to reimburse the state for the expenses it paid for the beneficiary through its Medicaid program. Any assets that remain after the state is reimbursed are distributed to residuary beneficiaries.
#7. WHAT IS A THIRD-PARTY SPECIAL NEEDS TRUST?
A third-party special needs trust is a trust that is funded with assets that do not belong to the special needs beneficiary.
This type of trust is usually created by the parents, grandparents, or other loved ones of a person with a disability. The settlor (the person creating the trust) can create the trust in a will or revocable living trust. The trust will come into existence on the settlor's death and be funded with the inheritance that the settlor leaves for the special needs beneficiary. Alternatively, the settlor can establish the trust as a stand-alone vehicle during the settlor's life. In this case, the settlor and others can contribute to the trust during their lifetimes and on their deaths.
A third-party SNT does not have to be irrevocable to protect the beneficiary's eligibility for benefits. But if the beneficiary has the right to revoke the trust, the trust assets will be considered as belonging to the beneficiary and could make him or her ineligible for benefits.
This type of trust does not require a payback provision. When the beneficiary dies, the assets remaining in the trust can go to other beneficiaries designated by the settlor. They do not have to be used to reimburse the state for Medicaid benefits paid on behalf of the beneficiary.
#8. WHAT IS A POOLED TRUST?
A pooled trust, or d4c trust (named for the section of the U.S. Code authorizing it, 42 US §1396p(d)(4)(c)), is established and managed by a non-profit organization. The disabled individual funds the account, which is a smaller account that is part of a master fund with other accounts by individuals with disabilities. The disabled individual benefits from his or her assets only, but the nonprofit organization oversees the entire fund, which includes several individual trusts. This type of trust may require a payback provision, and the beneficiary may need to make transfers into the account before age 65 to avoid a transfer penalty.
#9. DOES A SPECIAL NEEDS TRUST HAVE TO INCLUDE ANY SPECIAL PROVISIONS TO PROTECT THE BENEFICIARY'S PUBLIC BENEFITS?
Yes. To maintain the beneficiary's eligibility for public benefits, the trust may need to include specific language, including:
For first-party, third-party, and pooled SNTs, the trust must usually contain a statement that it was created “for the sole benefit” of the disabled individual. A third-party trust cannot be created to benefit the person who created it, such as by allowing the person to dispose of excess assets without incurring tax liability.
MEDICAID PAYBACK PROVISION
All but third-party SNTs must usually contain language that states that Medicaid will be paid back the value of services it provided to the beneficiary from any assets remaining in the trust after the beneficiary's death. In most states, a generic provision that states this information is sufficient. However, some states require the trust to name the specific state Medicaid agency.
BENEFICIARY CANNOT HAVE CONTROL OVER DISBURSEMENTS
The trust should state that the beneficiary will not have direct control over the trust or its funds. Instead, a third-party trustee should administer the trust. The beneficiary should not have the right to revoke, terminate, or assign the trust. Otherwise, it may be counted as a resource for Medicaid purposes and make the beneficiary ineligible for benefits.
SPECIFIC USE OF FUNDS
The trust should describe how the trust funds should be used to guide the trustee. This language may include specific uses that the funds are designed for, as well as a more general statement, such that the funds may be used for supplemental medical services.
MEDICARE SET-ASIDE PROVISION
In some situations, an SNT may need to include language that provides for a Medicare set-aside. For example, if the SNT is created because of a personal injury settlement, Medicare may have paid for medical services that were rendered as treatment for the injury. In these situations, a certain amount of funds may need to be set aside for repaying Medicare, as well as a certain amount of funds for future medical bills that Medicare would typically otherwise cover.
#10. WHAT DOES THE TRUSTEE NEED TO KNOW ABOUT ADMINISTERING THE TRUST?
Administering a special needs trust is a challenging prospect and many trustees seek legal assistance with this task. A trustee's mistake in administering the special needs trust can potentially jeopardize the beneficiary's public benefits, or even require the beneficiary to pay back public benefits he or she received during a time when he or she is deemed ineligible for benefits. The risks are serious.
There are specific rules about the value of assets the beneficiary can have, the ways trust funds can be used, and the control that the beneficiary can have over certain assets. The way property is titled can also have a major impact on the beneficiary. For example, purchasing a home for the beneficiary and holding the deed in the name of the trust would not typically affect the beneficiary's eligibility for benefits. However, if the trustee uses trust funds to pay real property taxes, mortgage payments, rent, heat, electricity, water, or other utilities, these payments can be considered income and can impact the beneficiary's eligibility for benefits.
The most basic rule for the administration of SNTs is that the beneficiary should not be given money directly from the trust so that he or she can make purchases. Instead, the SNT administrator should pay the vendor or provider directly for goods and services.
The trustee should usually purchase goods for the beneficiary in the trust's name and not the beneficiary's name to avoid arguments that the beneficiary would have control over the goods or that the beneficiary owns assets over $2,000, which could result in the beneficiary losing benefits.
In some situations, a non-refundable, prepaid gift card may be used. For example, the trustee may be able to give the beneficiary a gas card that can only be used to pay for fuel for his or her vehicle.
#11. ARE THERE ALTERNATIVES TO A SPECIAL NEEDS TRUST?
Yes. There are several Medicaid planning options, including using a Miller trust to account for excess income, transferring assets to a community spouse under spousal protection laws, setting up an Achieving a Better Life Experience (ABLE) Act account, and using other types of trusts and investment vehicles.
A revocable living trust is not an alternative to a special needs trust because the beneficiary typically has the right to order a distribution and revoke the trust, so the assets owned by it are typically considered part of the beneficiary's countable resources. There are particular rules regarding the transfer of property within five years of requiring long-term care or home-based services, so be sure you consult with a knowledgeable Medicaid estate planning lawyer before making any transfers that may jeopardize your or your loved one's benefits or subject you to a transfer penalty.
#12. WHERE CAN I LEARN MORE?
If you would like to learn more about special needs trusts, consult an estate planning lawyer with experience in this area. He or she will be familiar with the necessary language to include in the trust that complies with state and federal law. He or she can draft the trust for you and advise you on how to maintain eligibility for public benefits while giving the beneficiary access to additional services and comforts.