A Special Needs Trust, also referred to as a Supplemental Needs Trust, is a trust specially designed to hold assets on behalf of a disabled individual in a manner that will benefit the individual without jeopardizing SSI, Medicaid or other government benefits. Further, transfers in to a properly designed Special Needs Trust (also referred to as an “SNT”) will not be a disqualifying or sanctionable transfer for the person transferring assets in to the trust.
Before discussing SNTs further, however, having a basic understanding of what a trust is will be helpful.
What is a Trust?
A trust is a separate legal entity that results from an agreement between someone who sets up the trust (variously called a settlor, donor, or grantor) and a trustee who administers (conserves, invests and expends) the property in the trust for the benefit of a third party (called the beneficiary.
Almost any sort of property can be held in trust. This includes real estate, stocks, bonds, cash, mutual funds or insurance policies. In order to get the property in to the trust, however, someone must transfer the property to the trustee. In the case of real estate, for example, the settlor (or other property owner) simply prepares a deed naming the trustee as the grantee (and legal owner) of the property. Similarly, the settlor can change the name of the ownership on a bank or investment account. Finally, the trustee establishes a checking account to which parties can make deposits and from which the trustee can make distributions. In summary, one client asked me how to transfer assets to a trust, and I told her that basically it was done in the same way she would transfer assets to an individual.
While the trustee becomes the legal owner of the property, the law holds the trustee accountable for the property and the trustee must hold (or distribute) the property according to the terms originally put in the trust agreement by the settlor.
A trustee is what is known as a fiduciary. This means the trustee must use the property only for the beneficiary. The trust agreement (or trust document) should explain how the settlor wants the trustee to use the property for the beneficiary. Sometimes the trustee is given discretion to make decisions as to how the trust fund should be used.
Trusts may be either revocable or irrevocable. If the trust is revocable, it means that the trust may be amended, changed or revoked by the settlor. If the trust is irrevocable, it means that the settlor cannot revoke or modify the trust. Some trusts, especially SNTs, can contain language that allows the trustee or some other special person known as a “trust advisor” to amend the trust if it becomes necessary to do so because of changed circumstances. Nevertheless, the settlor would not be able to make those changes. For example, it might be necessary to amend the trust to comply with changes in state or federal law.
Why a Special Needs Trust?
As noted above, an SNT is a special type of trust designed to supplement benefits received by the beneficiary (such as SSI or Medicaid) without disqualifying the beneficiary for those benefits.
Disabled individuals often receive government assistance to help them maintain themselves. Of course, the most common of these programs are Supplemental Security Income (SSI) and Medicaid. Both of those programs require a person to be impoverished in order to receive benefits. If a person has too many assets or income that is too high, then he or she will not qualify for SSI benefits even if disabled. However, with an SNT, the assets being held in the trust will enable the person to continue to qualify for those programs.
Parents with disabled children also use SNTs to their advantage. Many are concerned that if they leave assets directly to their children who are disabled, the disabled children will fail to qualify for most government benefit programs and will quickly spend through whatever inheritance they receive. Some parents, often unwisely, try to work around this problem by leaving their entire estates to their non-disabled children with the hope that the non-disabled children will care for their disabled sibling. This does not always work.
An SNT can allow a person with disabilities to receive government benefits and continue to have a source of funds to pay for other goods and services that the government programs will not provide. Common examples are specially equipped vans with lifts, certain medical procedures that are not covered, travel to visit relatives in distant parts of the country, and various types of entertainment. These all enhance the quality of life of the disabled individual.
A disabled person can also fund an SNT for himself or herself. These sorts of trusts can hold a person’s assets (for example, an inheritance, a significant settlement from an injury or some sort of retroactive award of benefits). These will be discussed further below.
How Does an SNT Work?
As discussed above, the trustee is the person who makes distributions from the trust according to the instructions that are contained in the trust agreement. In the case of an SNT, the trust agreement must specify that distributions will be made in a way that does not jeopardize the beneficiary’s entitlement to SSI, Medicaid or other public benefits. All of these programs have stringent rules about how distributions from an SNT could affect the beneficiary’s eligibility for continuing benefits.
As discussed above, the assets contained in a properly drafted SNT will not “count against” the beneficiary for continuing benefit eligibility. On the other hand, if the trustee makes a cash distribution directly to the beneficiary, that payment will be considered income to the beneficiary which could jeopardize his or her continuing eligibility for benefits. Also, there are very complex rules regarding payments for food and shelter which are considered under SSI to be “in-kind support and maintenance”. This sort of income could reduce the beneficiary’s SSI benefits . . . or potentially eliminate them all together. Accordingly, it is extremely important the trustees be careful not to distribute any money in a way that will cause a problem with SSI or any benefit programs. Read HERE for more on how SNT distributions could affect SSI benefits (HUMOR ALERT: Funny article).
Some SNTs, however, might be drafted in such a way that a trustee could distribute money even if it eliminates the beneficiary’s public benefits. For example, the trustee may determine that the beneficiary’s needs for housing outweigh his or her needs for continuing SSI. In any event, the importance of adequate advice available to the trustee cannot be stressed too much.
What are the Different Types of SNTs?
Generally, there are two basic types of SNTs. First, there are self-settled trusts, and second, there are third party trusts.
As the name implies, a self-settled trust is set up using the disabled beneficiary’s own assets. For example, a disabled person who receives an inheritance or has some other property that disqualifies him for public benefits might have the property transferred in to a self-settled trust for his own use. Of course, a self-settled trust established to obtain SSI must meet stringent requirements. First, it must be irrevocable. That means the settlor cannot cancel or amend it. Also, the trust must be established by a parent, grandparent, legal guardian or a court (don’t ask why, it is a strange quirk in the law and makes no sense). Notwithstanding the term “self-settled”, the beneficiary cannot establish the trust for himself. Quite often seeking the appointment of a guardian who can establish the trust becomes necessary. Finally, the trust must contain a Medicaid “payback” provision, which will be discussed further below.
The second type of SNT is a third party trust. As the name implies, these types of trusts contain assets that belonged to some other party at the time of transfer in to the trust. Of course, the main example of this type of trust is one established by a parent for a disabled child. A parent could establish such a trust either while alive or under his or her will or living trust. The main advantage to these types of trusts is that there is no requirement for a Medicaid “payback” provision. In other words, the trust may hold assets for the benefit of a disabled child until that child’s death or some future point in time whereupon the assets are distributed to the other children of the settlor.
What are Medicaid “Payback” Provisions?
Medicaid payback provisions are those provisions in certain types of SNTs that require any remaining funds in the trust upon the death of the beneficiary to be distributed to the state. As mentioned above, not all trusts require these provisions.
Usually the funds remaining in a self-settled trust (the first type discussed above) upon the death of the beneficiary must be used to repay the state for benefits that the state had paid out while the beneficiary was alive. Any funds remaining in the trust after paying back the state, however, may be paid to other people specified in the trust document. These people are usually other family members. If a self-settled trust does not contain these Medicaid payback provisions, it will very likely be considered a “countable” asset for the beneficiary.
As mentioned above, funds contained in a third party trust do not have to go to the state.