25 Questions About Special Needs Trusts
1. I've never heard of a Special Needs Trust before. Is it something new?
A "Special Needs Trust" describes any trust intended to provide benefits without causing its beneficiary to lose public benefits that he or she is otherwise entitled to receive. There are two general categories of Special Needs Trusts: Self-Settled and Third-Party. The government specifically recognizes the use of these types of trusts through legislation passed in 1993.
2. What is a "Supplemental Benefits Trust"?
It's the same as a Special Needs Trust. Some lawyers simply prefer to use the term "Supplemental Benefits" or "Supplemental Needs" instead. The terms are interchangeable. They describe the Trust's purpose and are not legally different.
3. What is a "Self-Settled" Special Needs Trust?
Sometimes a recipient of public benefits receives assets such as a settlement or inheritance that prevents continued benefits eligibility. In this case, it may be possible — and advisable — to place the assets and assign income to a Special Needs Trust to regain or continue government benefits eligibility.
4. What is a "Third Party" Special Needs Trust?
Family members and others sometimes wish to provide for a disabled individual with their own funds. They are called a "Third Party". The government has different benefit eligibility rules for Self-Settled and Third Party Special Needs Trusts.
5. Who can establish a Special Needs Trust?
The government places restrictions on who may establish a Self-Settled Special Needs Trust if eligibility for certain public benefits is required. A Third-Party Special Needs Trust can be established by any individual other than the disabled individual or spouse. For Third-Party, the person establishing the Trust — called the settlor, grantor or trustor — chooses to make some of his or her assets available for the benefit of the disabled beneficiary. Third-Party Special Needs Trusts are often established by parents for their disabled children.
6. If a Special Needs Trust is established by a guardian or court for the benefit of a disabled person, is it still "Self-Settled?"
Yes. The law states that a Trust established with assets that would have belonged to the disabled person — through his or her guardian or conservator — is self-settled regardless of who signs the Trust instrument.
7. Does my family member need a Trust?
Special Needs Trusts may be needed for different reasons. Not everyone with disabilities who receives an inheritance or settlement needs a Special Needs Trust to continue benefit eligibility. However, a trust is also advisable if the disabled person may have difficulty managing the assets, is prone to be taken advantage of by others, or may require public benefits in the future. Often, parents who have been managing for their disabled children will set up a Special Needs Trust to provide continuity as their own age or medical conditions increase, and their ability to manage decreases.
8. What kinds of public benefits do Special Needs Trust beneficiaries receive?
Special Needs Trusts can protect different public benefits. Most commonly, Special Needs Trusts are intended to permit receipt of Supplemental Security Income (SSI) and Medicaid.
9. Does a Special Needs Trust qualify a person for public benefits?
No. A Special Needs Trust does not itself make public benefits available, although it will make it easier to qualify for them. The beneficiary must qualify for the benefits program — either before or after the Trust is established. If properly designed, the Trust will not cause a loss of benefits — although the level of benefits may be reduced in some circumstances.
10. Why would someone want to place assets in a Special Needs Trust just to qualify for government benefits?
Many of the goods and services provided by government benefits are extremely expensive and financially draining when paid for privately. Cash benefits may also be necessary to make ends meet over the lifetime of the disabled individual.
11. Must a person who receives Medicaid or other means-tested benefits stay on them?
No. The choice is up to the individual. If the disabled person regains independence, public benefits can be stopped, and some Special Needs Trusts can be designed to be terminated and the remaining funds distributed out. Government approved self-settled trusts usually have the most restrictions for termination.
12. What types of assets go into a Self-Settled Special Needs Trust?
These Trusts are often established by people who have received an inheritance or personal injury settlement — often from the incident that caused the disability. Sometimes people with pre-existing wealth determine that, upon becoming disabled, creating a Special Needs Trust is to their advantage. For example, a trust can hold real estate, an IRA, stocks and bonds, investment property, an annuity or structured settlement, or even receive alimony, child support, or other regular income.
13. Who should be in charge of the Trust?
This is one of the most important decisions in establishing a trust. The disabled person or spouse cannot serve as trustee. Other than that rule, there are a large variety of options. The trustee must be sensitive to the needs of the beneficiary and must be knowledgeable about government benefits and the administration of Special Needs Trusts. Parents who have good legal advice as a back-up often serve as sole trustees of third-party trusts that they create.
The combination of a family member and a professional trustee is often the best arrangement for administering the Trust. When a settlement must be approved by a Court, the Court often requires that a professional trustee be involved. Following capable parents, it's often not advisable to have a family member such as a sibling as sole administrator. Not only can it be difficult and arduous for one sibling to be in control of another, family members lack the necessary expertise to manage these specialized Trusts and often unintentionally abuse them, rendering the beneficiary ineligible to receive public benefits.
14. What special rules govern Third-Party Special Needs Trusts?
There are actually few rules. The most important rule is that the Trust terms should not create any entitlement by demand of the disabled individual to either income or principal. If the trustee has complete discretion whether to make distributions for the beneficiary, the Trust principal and income will usually not be counted as available.
15. What special rules govern Self-Settled Special Needs Trusts?
Self-Settled Special Needs Trusts are usually more complicated than Third-Party Special Needs Trusts. Typically, in cases involving Medicaid and SSI, a Self-Settled Trust must comply with a federal law requiring that it be established by a judge, a court-appointed guardian, or the parents or grandparents of the beneficiary. In addition, the trust must include a provision that repays state Medicaid agencies for benefits upon the death of the beneficiary — often called a "payback" provision.
16. When is a "Payback" provision required?
A "Payback" provision will be required only if the funds being used to establish the Trust belong the beneficiary such as a settlement or inheritance, and the individual will require certain public benefits. If a parent's funds are used to establish a Trust for a child, a payback provision is not required. Therefore, it is important that parents properly prepare their own estate planning to avoid a payback provision.
17. What does the Trust pay for?
A Special Needs Trust can provide for all types of medical treatment such physical therapy, medications, and medically related devices. It can provide for necessary requirements of daily living such as a vehicle and transportation, shelter expenses, clothing, and food. It also may allow for other life-enhancing items, such as education, entertainment, vacations, companionship, furniture and furnishings, and electronic devices such as a television, computer, and cable services. If the trust pays for food or shelter, the disabled person's SSI payments may be reduced somewhat. However, with proper Trust administration, at least a portion of all benefits can be preserved. Direct distributions of cash to the beneficiary are limited or not permitted depending on the benefit requirements.
18. Can a Special Needs Trust be used to buy a house or pay rent?
Yes, Special Needs Trusts often own houses or pay rent. However, the SSI program may reduce cash benefits somewhat for certain distributions for household expenses such as a mortgage, rent, utilities, and insurance.
19. Can a Special Needs Trust buy an automobile or van?
Yes, but due to liability and titling issues, other arrangements such as leasing, liens, or outright ownership by the disabled person may be preferable.
20. Can a Special Needs Trust pay for vacations?
Yes, but some discretion should be observed if public benefits are involved. Remember that if the Trust creates eligibility for a needs based public benefits program paid for by taxpayers and scrutinized by the legislature, the trust expenditures may occasionally be reviewed by a public benefits agency caseworker, who may not be very sympathetic to individuals who appear to be living too luxuriously.
21. Can a Special Needs Trust distribute cash to a beneficiary?
Any cash distributed to a SSI beneficiary by a Special Needs Trust, after the first $20. per month of any income, will reduce the SSI payment dollar for dollar. Medicaid rules differ, but may also be affected by cash. If only community level Medicaid is received, the rules may be more lenient depending on age. It is not good practice for a trustee of a Special Needs Trust to distribute cash without carefully reviewing the rules.
22. Can the Trust make gifts to persons other than the disabled person?
Yes and no. A Third-Party Special Needs Trust can be drafted to allow gifts, but federal and state laws stipulate that a Self-Settled Trust be "for the sole benefit" of the disabled person.
23. How are Trusts taxed?
There are income, gift, and estate tax considerations in establishing and administering a Special Needs Trust. These need to be carefully reviewed a competent attorney or accountant when the trust is established, funded, distributions are made, and upon termination.
24. Is it easy to establish a proper Third-Party Special Needs Trust?
While the benefit eligibility principles involved in Third-Party Special Needs Trusts are easier than Self-Settled Trusts, there are a myriad of choices involved in the actual drafting of any type of Trust. In addition, administration can be extremely difficult. A seasoned attorney, familiar with public benefits programs and Special Needs Trust provisions, should always be involved in preparation of a Trust. While some legal matters can be undertaken without a lawyer, or with a lawyer with a general background, Special Needs Trusts are complicated enough to almost always require the services of a specialist.
25. Once a Special Needs Trust is established, can the disabled person move to another state?
Yes. However, public benefit eligibility requirements differ from state to state, so the Trust must be created in a flexible enough way to permit it to be amended or adapted without giving up the protection that it provides.