For families caring for a loved one with a disability, special needs trusts can provide peace of mind. Special needs trusts allow the family to improve the quality of life for the loved one, without jeopardizing eligibility for government benefits. It’s best not to give money or property directly to a person who needs government assistance because if you do, that gift will almost certainly make the loved one ineligible to receive aid. Third-party special needs trusts provide a solution to that problem and they also help to ensure that the beneficiary gets as much as possible out of the family’s gift. You must follow the rules when creating and living with special needs trusts, but if your needs are simple, you may be able to do this work without a lawyer. A way around losing eligibility for SSI or Medicaid is to create what’s called a special need or supplemental needs trust. Then, instead of leaving property directly to your loved one, you leave it to the special needs trust. You also choose someone to serve as trustee, who will have complete discretion over the trust property and will be in charge of spending money on your loved one’s behalf. Because your loved one will have no control over the money, SSI and Medicaid administrators will ignore the trust property for program eligibility purposes. The trust ends when it is no longer needed commonly, at the beneficiary’s death or when the trust funds have all been spent.
Setting Up the Trust
First, you must create the trust document. You do not need a lawyer to set up a basic no-frills special needs trust, and having one that you make yourself is often better than not having a trust at all. However, many families will benefit from getting trust tailored to their specific situation. To get a personalized trust, consult a lawyer for help.
In the trust document, the person setting up the trust (usually called the “grantor” or “settlor”) places property in the hands of another person to manage the trust (called the “trustee”). Typically, the grantor of a special needs trust names himself or herself as trustee and another trusted person successor trustee. The grantor serves as trustee until he or she dies, becomes incapacitated, or resigns; at that time the successor trustee takes over. Each person who serves as trustee is legally obligated to follow the terms of the trust document to use the property for the benefit of the person with special needs, identified in the trust document (the “beneficiary”).
Finalizing and the Initial Funding of the Trust
The trust will take effect when you sign it and have it notarized. Not long after that (when you get the trust’s tax identification number from the IRS), you can add a little cash to the trust by opening a bank account with a minimal deposit. At that point the trust is ready to be funded through the wills, living trusts, beneficiary designations, or other estate planning tools of those who want to help support the beneficiary with special needs. Anyone (except beneficiary of the trust) can contribute property to a special needs trust. Although these trusts are most often created by parents for their children, you don’t need any family relationship to create or give money to a trust for someone. And there is no limit to the number of trusts that may be created for a particular beneficiary. Virtually any type of property can be held in a special needs trust, including real estate, stocks, collections, a business, patents, or jewelry. But because the primary purpose of a special needs trust is to use cash money to pay for items that aren’t provided by SSI or Medicaid, special needs trusts typically give the trustee authority to sell tangible items (cars or jewelry, for example) to raise cash. In order to decide whether to keep or sell tangible items, the trustee will need a good understanding of the beneficiary’s personal needs and basic sound investment rules. Learn more about The Trustee’s Job.
How Assets Get Into the Trust
The person who creates a special needs trust often makes the initial transfer of assets into the trust usually just a small amount of money. Then, commonly, a parent, grandparent, or other relative leaves property to the trust by:
• leaving it through a will or revocable living trust directly to the trustee of the special needs trust, or
• naming the trustee of the special needs trust as a beneficiary on a designation form that controls what happens to a deposit or brokerage account, retirement plan, or stocks and bonds.
After the trust is funded, the trustee role becomes critical. The main job of the trustee is to use trust funds to support the beneficiary without jeopardizing government benefits. In order to do this, the trustee must have a good understanding about how eligibility works and he or she must be willing to keep up with the law. The trustee also has many other duties, including paying taxes, keeping records, investing trust property, and keeping up to date with the beneficiary’s needs.
Trust assets can be used for almost anything that is not illegal or contrary to the terms in the trust. Because the primary purpose of a special needs trust is to enhance the quality of life of the beneficiary with a disability, the list of things that can be paid for is quite broad. Generally, trust funds can be used to pay for:
• care giving, such as a personal attendant or therapies not paid for by Medicaid
• experiences, such as travel or concerts\
• services, such as a cell phone, internet, or cleaning service
• pet care, such as pet food or veterinarian care, or
• things, such as a computer, clothing, or new furniture.
Payments for food or shelter are more complicated because they generally trigger a reduction in SSI benefits. However, even though it’s tricky, it often still makes sense for trustees to use trust funds for food and shelter because there are exemptions and rules that make the trade-off worthwhile. On the other hand, trust funds cannot be used for things that would make the beneficiary ineligible for government benefits, such as large gifts of cash.
Terminating the Special Needs Trust
The special needs trust ends when it’s no longer needed. There are four reasons to end a special needs trust:
• Trust funds are depleted.
• The beneficiary no longer needs government benefits.
• The beneficiary is no longer eligible for government benefits.
• The beneficiary dies.
Third-Party Special Needs Trusts
Third-party SNTs are commonly used by persons planning in advance for a loved one with special needs. Typically, the parents of an individual with disabilities or special needs will be the persons who establish a third-party SNT, although a grandparent, a sibling, or any other person (other than the beneficiary) may establish the SNT. Third-party SNTs can be included in a Last Will and Testament, established within an inter vivo trust that is designed to avoid probate (“Living Trust”), or drafted as a stand-alone SNT. These SNTs are typically funded upon the death of the beneficiary’s parents or the other individual(s) who established the SNT. SNTs created under a Will or as a subtrust within a Living Trust do not come into existence (and therefore cannot receive gifts) until after the death of the individual whose Will or Living Trust created the SNT. Therefore, a stand-alone SNT may be more useful if there are multiple donors who wish to fund the SNT. A stand-alone SNT exists during the lifetime of the person establishing the SNT, which allows the SNT to receive gifts from grandparents, family friends or even the person establishing the SNT, prior to the death of the SNT’s creator. Such an SNT is available as a receptacle for lifetime and post mortem gifts from any third-party source. This type of SNT does not have to be irrevocable in order to preserve the eligibility of the SNT beneficiary for means-tested public benefits. However, if the SNT beneficiary has the power to revoke the SNT, the SNT assets would be considered an available resource for Supplemental Security Income (SSI) and Medicaid purposes. The beneficiary’s ability to revoke the SNT or otherwise exercise control over the SNT may render the beneficiary ineligible to receive public benefits that have an income or asset limit. The SNT agreement should authorize the person establishing the third-party SNT and/or the trustee to amend the SNT to address later changes in the law or the circumstances of the beneficiary. Allowing for such limited amendments helps ensure that essential government benefits are preserved if an agency challenges the terms of the SNT.
The most important difference between third-party SNTs and first-party SNTs is what happens to SNT property when the beneficiary dies. Upon the beneficiary’s death, the third-party SNT is not required to use the remaining assets to reimburse any state(s) for the Medicaid benefits received by the beneficiary during his or her lifetime. As a result, this type of SNT is a useful planning tool for people who want to set aside property for a beneficiary with disabilities, preserve essential public benefits during that beneficiary’s lifetime, and remain in full control of where all of the remaining SNT assets will go upon the beneficiary’s death.
First-Party Special Needs Trusts
First-party SNTs are most often used when the person with a disability inherits money or property outright, or receives a court settlement. These SNTs also are useful when a person without a prior disability owns assets in his or her name, later becomes disabled, and thereafter needs to qualify for public benefits that have an income or asset limitation. These SNTs are creatures of federal law, specifically individual first-party SNTs are authorized pooled first-party SNTs are authorized. First-party SNTs also are commonly called self-settled SNTs, Medicaid payback trusts, OBRA ’93 trusts, and d4A or d4C trusts. Until the Special Needs Trust Fairness Act became law late in 2016, the only persons or entities authorized to “establish” (create) an individual first-party SNT were the SNT beneficiary’s parent, grandparent, legal guardian, or a court. Since December 13, 2016, federal law also authorizes a mentally and legally competent SNT beneficiary to establish an individual first-party SNT. A first-party SNT is funded with property that belongs to the beneficiary, or to which the beneficiary is or becomes legally entitled. Property in a first-party SNT can only be used for the “sole benefit” of that beneficiary. Individual first-party SNTs may be created (and funded) only for individuals who meet the government’s definition of “disabled” and are under sixty-five years of age when the SNT is established (and funded). While a pooled first-party SNT can be established by individuals over sixty-five years of age in many states, a significant number of states do not allow a person over age sixty-five to establish or transfer property to a pooled first-party SNT without penalty. Pooled first-party SNTs can be established by the beneficiary, the beneficiary’s parent, grandparent, or guardian, or a court. If the SNT beneficiary is not mentally and legally competent, then court approval must be obtained to fund the SNT with the beneficiary’s property. All first-party SNTs must specify that after the beneficiary’s death, all amounts remaining in the SNT, up to an amount equal to the total lifetime medical assistance benefits paid on behalf of the beneficiary by the Medicaid program(s) of any state(s), are first repaid to those state Medicaid program(s), even to the extent of fully exhausting the remaining SNT assets. Only after this Medicaid payback may any balance be distributed to other remainder beneficiaries.
A legally competent person with a disability may have a first-party SNT established and funded without court involvement. However, annual accountings should be provided on an informal basis to the beneficiary and to the applicable Medicaid agencies. When a minor or mentally incompetent adult is legally entitled to receive funds from a lawsuit, an inheritance, or from any other source, then court approval to establish and fund the first-party SNT is required. Often, the court must make specific findings to ensure that the SNT is considered “exempt” when determining the beneficiary’s eligibility for public benefits that have income or asset qualification thresholds. These findings could include:
• The minor or adult has a disability that substantially impairs the person’s ability to provide for his or her own care or custody, and constitutes a substantial handicap. In practice, a person who qualifies for SSI or Medicaid on the basis of disability is likely to satisfy the substantial impairment requirement.
• The minor or adult is likely to have special needs and expenses that will not be met without setting aside assets in the SNT.
• The property used to fund the SNT does not exceed the amount that appears reasonably necessary to meet the special needs of the minor or adult.
Pooled Special Needs Trusts
Pooled SNT programs can be used to establish both first-party and third-party SNTs. Pooled SNTs are established and administered by a non-profit association for the benefit of multiple beneficiaries. Pooled SNT programs have the following features:
• A separate account is maintained for each individual beneficiary of the pooled SNT, but the administrator pools the assets of all accounts for purposes of investment and management.
• A master trust agreement governs the separate accounts of all SNT beneficiaries pursuant to a “joinder” document.
• An account with the pooled SNT is established for the sole benefit of an individual with disabilities by the parent, grandparent, or legal guardian of the individual, by the individual personally, or by a court. The beneficiary of a first-party account must meet the government’s definition of “disabled.”
• While there is no express prohibition against establishing and funding a first-party account with a pooled SNT if the beneficiary is sixty-five years of age or older, most states do impose an eligibility penalty in that situation.
• For first-party accounts with pooled SNTs in all states any assets remaining in the beneficiary’s separate account upon his or her death, to the extent not retained by the pooled SNT, first must be used to reimburse the Medicaid program(s) of any state(s) that has provided medical assistance for the beneficiary. However, a state is not entitled to receive more than the amount remaining in the beneficiary’s separate account, even if the amount owed to the state is greater than the amount remaining in the deceased beneficiary’s separate account.
Special Needs Trust Lawyer
When you need legal help with a special needs trust in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506