A few months ago, the Social Security Administration released new POMS on the sole benefit rule for first-party special needs trusts.

A first-party special needs trust (SNT) is an SNT established to hold the property of the beneficiary – the disabled person.  Often this is funded as part of a lawsuit, using funds that a disabled person won or received in settlement of a personal injury lawsuit.

In order for the beneficiary (the disabled person) of the SNT to qualify for SSI, Medicaid and other benefits, distributions (payments) from the SNT must be for the sole benefit of the beneficiary.  This is called the sole benefit rule.

For some things, this is clear.  If the trust pays for a doctor visit for the beneficiary, it’s clearly for the beneficiary’s sole benefit.

But what if the trust purchases a house for the beneficiary?  If the beneficiary is a young child, odds are good that her parents are taking care of her, and her parents are going to live with her in the house.  Perhaps her siblings would live there too.  If the trust buys a house for the beneficiary, but she has other family members living there, was the house purchase really for the beneficiary’s sole benefit?

What if the beneficiary likes watching TV?  The trust might buy a television for the living room of the house, and the beneficiary will watch it there.  But other family members will probably watch it too.  Is the purchase then really for the beneficiary’s sole benefit?

Previously this wasn’t clear, and some trustees had significant problems as a result.  However, the new POMS provide some guidance:

“The key to evaluating this provision is that, when the trust makes a payment to a third party for goods or services, the goods or services must be for the primary benefit of the trust beneficiary. You should not read this so strictly as to prevent any collateral benefit to anyone else. For example, if the trust buys a house for the beneficiary to live in, that does not mean that no one else can live there, or if the trust purchases a television, that no one else can watch it. On the other hand, it would violate the sole benefit rule if the trust purchased a car for the beneficiary’s grandson to take her to her doctor’s appointments twice a month, but he was also driving it to work every day.”

So distributions must be for the primary benefit of the beneficiary, but may allow incidental benefits to third parties.  I think the key here is whether that incidental benefit is is reasonable, as the examples illustrate.

The POMS also provide guidance of travel expenses, credit cards, and other important issues, which we’ll try to cover in forthcoming blog posts.  In the meantime, if you have any questions about special needs trusts, call (908-704-1900) or email FriedmanLaw today.