The Guide to Special Needs Trusts
A special needs trust is a document you create to provide for a beneficiary who has a disability, chronic illness, or injury and relies on government assistance. The purpose of a special needs trust is to preserve current and future eligibility for two important government benefits such as Medicaid and/or Supplemental Security Income (SSI).
When properly drafted and administered, a special needs trust will allow your beneficiary to receive funds from the trust while continuing to receive government benefits.
This guide will give you some of the most important aspects of a special needs trust, the rules you need to follow when creating one, and the expenses for which a special needs trust can pay. You will also learn about how to set up a special needs trust and the costs associated with creating one.
Benefits of a Special Needs Trust
Let’s discuss the benefits of a special needs trust, and why should you consider one?
First, lets agree on this. If you have a loved one that is either receiving governmental benefits (such a Medi-cal, Medicaid, SSI) then you should consider a Special Needs Trust (hereinafter referred to as SNT).
A SNT allows your beneficiary to continue receiving government funds while also being able to use and receive other resources. There are two main government benefits that are important are:
1. Medicaid (or medi-cal in California). This program helps individuals and families with disabilities pay for health costs and is the principal source of long-term coverage for many. This includes skilled nursing facilities and in-home caregiving support (depending on the state).
2. Supplemental Security Income (SSI). This taxpayer-funded program is allotted to those with disabilities to help them pay for basic needs such as food, clothing, and shelter.
Here is an example or scenario to consider:
A disabled individual who is eligible to receive SSI suddenly receives funds that exceed $2,000. There is a $2,000 resource limit for SSI (this is changing in California but not in most other states), which means that when the individual receives their additional funds, they will no longer maintain eligibility for SSI. In most states, this means the individual or household may also lose Medicaid eligibility.
With a SNT the individual can place that extra income into the SNT and still KEEP their SSI and Medicaid eligibility.
This is what makes SNT’s so powerful and a great planning tool. Everything within the special needs trust is excluded (its not counted) from the strict asset and income limits set by state Medicaid programs and Social Security.
How to Set Up a Special Needs Trust
First, let me say this – this is a complicated area of the law and this guide is to give you an overview so you know what to look for and the questions to ask when interviewing a professional, but it is not recommended that you attempt to set up a SNT on your own.
The different types of Special Needs Trusts
The entire purpose of a special needs trust is to ensure the financial security of your loved ones who live with a disability by protecting eligibility for government benefits like Medicaid and Supplemental Security Income (SSI).
A special needs trust can help to improve a disabled individual’s life by increasing the longevity of funds using government benefits. It also pays for expenses that are not otherwise covered by government assistance such as a vehicle, equipment, vacations, etc.
Individual vs. Pooled Special Needs Trust
Ok, first let me start with most attorneys do not understand the difference and benefits of individual vs. pooled SNTs, so if you don’t understand it on the first reading don’t fret.
When you create your special needs trust, you’ll need to consider whether you want an individual trust or a pooled trust. Knowing what the different will help you understand the different types of special needs trusts.
An individual trust, also known as a D4A trust (this term is used by lawyers), gives an individual person the power of trustee. If Medicaid recovery (remember the Government can send a bill in an attempt to recover their costs in certain circumstances) is more than the trust, all of the remaining funds will go to Medicaid.
An individual trust is typically a more expensive option to create than a pooled trust because it takes a longer amount of time to create. However, some cases require an individual special needs trust instead of a pooled trust.
A pooled trust, also known as a D4C trust (again, this is the lawyer term), gives a 501(c)(3) or nonprofit association the power to act as a trustee, while an appointed trust beneficiary advocate of your choosing may act as a liaison. If Medicaid recovery is more than the trust, the charity retains the extra funds to serve future clients and fund its operation.
One benefit to this is that a pooled trust may allow the disabled loved one to enjoy additional services without a large income because of the shared costs.
This struggle with pooled trusts is locating the best 501(c)3 to serve as trustee. Also, if you are located in a less dense area it may be difficult to locate a pooled trustee. Pooled trusts are popular in the California Bar area, Los Angeles, and other large cities.
Main Types of Special Needs Trusts
Now that you understand the difference between a pooled and individual trusts, we will now explore the different types of SNT trusts.
“First-Party” Special Needs Trust
First-party special needs trusts preserve the assets of a disabled person while using their funds. Said another way, the person’s own “supplemental finances,” or “supplemental income,” are used to fund the trust and are exempt from Social Security and Medicaid’s eligibility criteria. This allows your loved one them to receive supplemental income while still qualifying for government benefits such as Social Security Income (SSI) and Medicaid.
A person’s supplemental income that may be used to fund the trust generally include:
· Settlements;
· Workers’ compensation settlements;
· Inheritance;
· Personal injury settlements;
· Divorce settlements;
· Retirement plans or life insurance policies;
If you fail to form a trust with the above funds for a disabled individual, that individual may become ineligible to receive public or government benefits. Many government programs are means-tested and only allow the individual to own a maximum of $2,000 worth of assets or income (in California), and most states have lower thresholds.
Please note that in 2022, California is changing the means-testing requirements by substantially increasing the limits.
Thus, even a small amount of inheritance or settlement funds may cause an individual to lose government benefits.
By placing these funds into a Special Needs trust, the disabled person can continue receiving government benefits while safely receiving their other finances. Although a first-party special needs trust is funded with the beneficiary’s supplemental income, it still requires the appointment of a “trustee.” Essentially, this person receives the property for the individual and has full discretion to make distributions that benefit the disabled individual. A trustee may be a family member or friend who the beneficiary trusts to make decisions and disbursements on their behalf, however, it cannot be the disabled person.
Who is a First-Party Special Needs Trust right for?
Who is the perfect candidate? Below are the classic example/senario that would be the ideal FP SNT:
Accident or illness. If your loved one suffers an accident or illness that causes them to be disabled and now qualifies for government benefits. A first-party special needs trust would help in this situation. The individual would put their income or settlement funds “in trust” to qualify for government benefits indefinitely or, alternatively, as long as they need them.
In essence, a first-party special needs trust helps individuals who may receive other assets or income as well as government benefits.
This allows your loved one to continue their governmental benefits and receive the inheritance or settlement. This must be done with certain timing so as not to “kick” them off benefits so speak to your lawyer or other consultant regarding the timing.
Let’s discuss First-Party Pooled Special Needs Trust
A pooled special needs trust offers all the same statutory protections as a first-party individual special needs trust. However, this type of trust is administered by a nonprofit organization, or 501(c)(3) tax-exempt charity. Your loved one’s money is pooled or linked together so the funds can be combined with multiple other people to get a “bigger bang for your buck” so to speak. Since these trusts are designed to supplement the beneficiary’s life while they are living, Medicaid reserves the first right to recover on trust funds at the time of the client’s passing.
Third-Party Special Needs Trust
This is most common special needs trust. Typically, this is the SNT trust that grandparents or other family members set up for a disabled family member. Third-party special needs trusts help those who live with special needs and may not be able live on their own or earn a regular income. This type of trust is funded by the person’s relative or another party rather than the person themselves.
A third-party special needs trust is a legal way for relatives or friends to provide financial support for the beneficiary without affecting their government benefits. The most important thing to remember on 3rd party SNT is that Medicaid has no right to recovery on these funds.
Most of the time, a third-party special needs trust is included in a person’s estate plan or will. Most lawyers would draft the following language within the will or trust “The distribution to JOHN DOE is to be placed into a Special Needs Trust to preserve JOHN DOE’S ongoing eligibility for means-tested government benefits.”
It is important that you think long and hard about who you will choose as the trustee.
Do you need a Third-Party Special Needs?
We could spend the next hundred pages on who should get a 3rd party SNT. In essence, the SNT is for is anyone who has a loved one that is disabled or has special needs that receives or may receive governmental benefits.
Special Needs Trust Rules
There are many rules that govern SNT’s and depending on what state you are in depends on how developed the law may be in regards to SNT. If the trustee violates the law or the terms of the SNT trust it could expose the trustee to personal liability and cause the beneficiary to lose the protections afforded by the SNT.
To take advantage of the benefits a special needs trust, keep these three rules in mind:
1. Disbursements must be made for the benefit of the individual (disabled person). All disbursements from the SNT must be for the special needs individual’s primary benefit. That is, payments should be on behalf of or to the benefit of the individual. This may mean that the trustee purchases healthcare or items related to the disability. The rule of thumb is that the trust assets can help to provide for the individual’s general needs not covered by government assistance.
2. Disbursements must be payable to a third party. This means that funds cannot be made payable directly to the special needs trust beneficiary. Let me repeat – funds cannot be made payable directly to the special needs trust beneficiary.
3. Recordkeeping is a must. Administering a trust requires thorough recordkeeping. This means keeping all receipts and/or invoices as well as any other evidence of accurate disbursement and transaction records. Note that this rule, like the others, is required by law. The Social Security Administration Office (SSA) or Medicaid/Medi-Cal office may request copies of these records and review such records. The Court may also review the records if the Trust is Court supervised.
