Special Needs Trusts

What is a Special Needs Trust?

A Special Needs Trust (also known as a Supplemental Care Trust or Supplemental Needs Trust) is a discretionary trust designed to provide for a disabled individual's supplemental care (i.e., those things not provided under public benefit programs), while maintaining his or her eligibility for public benefits.

Its primary purpose is to preserve inheritances, personal injury settlements and awards, and other assets for use by a disabled individual without disqualifying him or her from eligibility for public benefits.

In order to obtain financial and medical benefits under most public benefit programs, such as the Supplemental Security Income program (SSI) or Home and Community Based Services (HCBS) Medicaid, an individual must:

  1. Be disabled as defined under the Social Security Act;
  2. Have limited income; and
  3. Have no more than $2,000 in countable or non-exempt assets.

In determining whether an individual has more than $2,000 in countable assets, the Social Security Administration and State disregard certain exempt assets, such as a home, one automobile, personal property and a few other items, and counts virtually everything else.

Who Should Consider a Special Needs Trust?

Special Needs Trusts are very appropriate for parents of disabled adult or minor children who wish to leave their children more than $2,000 in countable assets. These parents are concerned about who will care for their child, and how that child will be provided for, once the parent passes away. If the parent leaves all of his or her assets directly to the disabled child, that child will not be financially eligible for public benefits until the inheritance is spent down. Once spent down, public benefit programs may then provide for the disabled child's basic needs. There will not, however, be any funds available to supplement the disabled child's basic needs. In some circumstances, the parent may choose to leave an inheritance with a brother or sister of the disabled child, hoping that he or she will use the money for their disabled sibling. Unfortunately, however, those funds may not benefit the disabled child if the brother or sister has creditor problems, predeceases or has a divorce.

By utilizing a properly drafted Special Needs Trust, these results can be avoided. In essence, a Special Needs Trust allows the disabled individual to keep both the inheritance as well as the public benefits. The Special Needs Trust is a mechanism which provides for those extras that can make the difference between subsisting and thriving.

How Does the Special Needs Trust Preserve Eligibility for Public Benefits?

A trust is a separate legal entity. Funds are transferred into the trust to a person called the trustee, who is responsible for managing, investing and distributing the assets or property of the trust. The trustee holds the funds for the benefit of the disabled person, who is called the beneficiary of the trust. The person who establishes the trust and who initially transfers the property or causes the property to be transferred to the trust is called the grantor or settlor. This is often the parent.

In order to understand how the Special Needs Trust can shelter inheritances and personal injury funds, it is necessary to understand the concept of availability. Availability is the standard used by governmental agencies to determine whether assets (including trust funds) will be counted for purposes of determining asset or resource eligibility for public benefits. As indicated above, an individual cannot have more than $2,000 in non-exempt assets to qualify for SSI and most Medicaid programs. In general, if an applicant or recipient can gain access to an asset or resource, it will be deemed available to that individual for purposes of resource eligibility and, therefore, will be countable against the $2,000 maximum. If, however, access to such funds is restricted such that only the trustee, a court or a third person (and not the disabled child beneficiary) has authority to make distributions from the trust, then such funds are deemed legally unavailable to the beneficiary, and are not counted for public benefit eligibility purposes. Simply put, Special Needs Trusts are drafted so as to make the trust funds unavailable for purposes of Medicaid eligibility.

What Types of Distributions May Be Made From Special Needs Trusts?

Special Needs Trusts are designed to supplement, rather than to supplant or replace, goods and services already provided under a public benefit program such as Medicaid. A properly drafted Special Needs Trust should therefore make it clear that:

  1. Trust funds are not legally available to the beneficiary in the sense that he or she cannot compel or require a distribution; and
  2. Trust funds should not to be used for food or shelter-related items or for services already provided by a public or private benefit program. For third-party funded trusts (see discussion below), there may be more flexibility.

Examples of acceptable special or supplemental needs that can be paid for by the trustee of the Special Needs Trust include, but are not limited to, the following:

  • Support services, dental care, physical therapy, massage and other medical costs to the extent not covered by some other public benefit program;
  • Payments for tuition, books and supplies;
  • Transportation to and from school;
  • Health and life insurance premiums;
  • Books, magazines and video games;
  • Season tickets for plays, museums and sporting events;
  • Televisions, VCRs, CDs, sound systems, computers;
  • Hobbies;
  • Vacations;
  • Costs for travel companions;
  • Automobile;
  • Automobile maintenance expenses, car insurance and gasoline;
  • Cleaning supplies and paper products;
  • Bus passes;
  • Telephone, cable television, Internet;
  • A pre-paid burial/cremation and funeral plan. If $1,500.00 or less, it can be revocable, if more than $1,500.00, it should be irrevocable;
  • Cost differentials between private and semi-private rooms in institutional settings;
  • Clothing.

Examples of distributions from a Special Needs Trust that can adversely affect public benefits include the following:

  • Payment of rent, mortgage or real property taxes;
  • Heating and cooling bills;
  • Electricity, water, sewage and garbage collection;
  • Payments for groceries or meals; and
  • Cash distributions directly to the beneficiary (with the exception of the $20.00 unearned income disregard under the SSI program).

Such items should usually be purchased by the beneficiary using his or her SSI payments or other public benefits such as food stamps.
Trustees of Special Needs Trusts should be granted full discretion meaning they have the absolute right to decide whether or not to distribute funds. If the trustee is required to distribute income or principal, rather than granted the choice to do so, the amounts subject to mandatory distribution will be deemed countable regardless of whether actually distributed.

Types Of Supplemental Care Trusts

Third-Party Funded Trusts: A third party funded special needs trust is a trust which contains assets belonging to someone other than the beneficiary, such as a parent or other relative. These types of trust are typically established under the last will and testament of the parent.

The will provides that upon the parent's death, any assets that are to go to the disabled child are to be held in a Special Needs Trust, the terms of which are contained either within the will, or in a separate trust document which is cross-referenced in the will. Third party funded special needs trusts can be very flexible and, unlike the self-settled Disability Trusts (discussed below), can contain provisions allowing funds remaining in the disabled child's trust to pass to the parent's other children or grandchildren upon the disabled child's death. This is in contrast to the Disability Trust which must provide that remaining funds first be used to repay Medicaid expenses incurred by the state.

Self-Settled Trusts: A self-settled special needs trust is a trust which contains assets that the disabled child already owns or is legally entitled to. These assets include the disabled individuals' own savings, personal injury settlement, and more commonly, inheritances that the disabled child is entitled to receive outright - for example, where the parent fails to set up a third-party funded special needs trust in their will and the inheritance goes directly to the disabled child.

In order to shelter assets that already belong to the disabled child or to which he or she is already legally entitled, there are only two types of trusts that can be used to maintain Medicaid eligibility: a Disability Trust, and a Pooled Trust, both of which are described in more detail below.
1) Self Settled Disability Trust: In order to be a qualified Disability Trust:

  • The beneficiary must be disabled as that term is defined by Social Security Law;
  • The beneficiary must be under age 65;
  • The State must be designated as the remainderman, thereby entitling it to any funds remaining in the trust at the beneficiary's death;
  • The trust must be established by a parent, grandparent, legal guardian or court;
  • The trust must be reviewed and approved by the Colorado Department of Health Care Policy and Financing (unless already approved by the federal Social Security Administration); and
  • The trust must be drafted as a special needs trust (i.e., funds must be legally unavailable to the beneficiary).

2) Self Settled Pooled Trusts: The second type of permissible self settled trust is a Pooled Trust. This form of trust is very similar to the Disability Trust, except that it is run by a non-profit agency. In order to be a qualified pooled trust, the following requirements must be met:

  • The beneficiary must be disabled as defined under the Social Security Act and, unless waived by the state, under the age of 65;
  • The trust must maintain a separate sub-account for each beneficiary;
  • The trust must be established and managed by a non-profit association (e.g., Colorado Fund for People With Disabilities);
  • The trust must be established by parent, grandparent, court, guardian or the individual;
  • The state must be designated as the remainderman except to the extent the pooled trust retains the funds (the trust will almost invariably retain);
  • The trust must be reviewed and approved by the Colorado Department of Health Care Policy and Financing; and
  • The trust must be drafted as a Special Needs Trust (i.e., funds must be legally unavailable to the beneficiary).

When Should You Set Up a Special Needs Trust?

If you are contemplating leaving anything to your special needs loved one, you need to set it up now. As discussed above, if you fail to do so, then the only choices left to your disabled child is to immediately spend down the inheritance, or place it in a Disability or Pooled Trust, which are less flexible and contain provisions which require any funds remaining in the trust at death, be paid to the State, or to remain with the Pooled Trust, rather than passing on to other heirs.

Conclusion

Special Needs Trusts are not for everyone. When the amount of trust funds is small, or the medical needs of the disabled loved one are limited, the cost of establishing and administering the special needs trust may not warrant its establishment. When such medical costs are higher, or there is a need for oversight and management of an inheritance, settlement or other assets, the Special Needs Trust can provide significant benefits.

NOTE: THIS DOCUMENT IS A SUMMARY AND IS FOR INFORMATIONAL PURPOSES ONLY. BECAUSE LAWS MAY CHANGE AND THE RESULTS MAY VARY BASED ON PARTICULAR FACTS AND CIRCUMSTANCES, ATTORNEYS SHOULD EXERCISE CAUTION AND CONDUCT THEIR OWN LEGAL RESEARCH PRIOR TO ACTING ON ANY SUCH INFORMATION, AND INDIVIDUALS SHOULD CONTACT AN EXPERIENCED ELDER LAW ATTORNEY PRIOR TO ACTING ON ANY SUCH INFORMATION.

©Vincent, Romeo & Rodriguez, LLC, 2/20/09, All rights reserved.