Special Needs Trust

Special needs trusts (SNT) (aka supplemental needs trusts or supplemental benefits trusts) are used to set aside money, property, and valuables to supplement benefits from government programs that limit eligibility to people with minimal income and/or assets. Such means-tested programs include Supplemental Security Income (SSI), Medicaid, housing subsidies, New Jersey Department of Human Services Division of Developmental Disabilities (DDD) housing, and DDD day programs.

Special needs trusts can shelter lawsuit settlements and awards, inheritances and gifts, child support, alimony, earnings, and even lottery winnings without impairing eligibility for means-tested aid but only when properly drafted. An SNT that isn’t drafted or administered in accordance with complex means-tested benefit rules may disqualify the SNT beneficiary for crucial government programs that provide support, housing, and medical care.

Special needs trusts most often are used to supplement means-tested aid for people with developmental disabilities and other serious disabilities. However, SNTs also can preserve means-tested aid for people who don’t have disabilities. Consequently, much of our discussion of special needs planning for people with disabilities applies similarly to low income families, children, blind people, senior citizens, pregnant women, and others who receive means-tested public benefits.

What is a special needs trust?

Means-tested benefits are available only to individuals with minimal incomes and/or assets. Nearly all receipts, savings, and other amounts that a participant can access unilaterally count against eligibility limits for SSI, Medicaid, and other means-tested benefits. As a result, most gifts, transfers at death, and litigation recoveries are disqualifying if paid outright or even into many kinds of trusts.

Special needs trusts are different. SNTs allow money and valuables to supplement means-tested aid instead of replacing it. Thus, your special needs trust may buy you goods and services like healthcare, food, transportation, hobbies, vacations, and other purchases that can improve your life but wouldn’t be covered by most government programs.

Although your special needs trust may be spent only for you, the SNT trustee rather than you as beneficiary decides when and why to spend your SNT. An SNT preserves eligibility for means-tested programs because the SNT trustee has a legal right to refuse your requests to spend the SNT. Because you can’t access the SNT unilaterally, the SNT doesn’t count against your means-tested benefit eligibility limits.

What should I think about when creating a special needs trust?

At FriedmanLaw we don’t draft special needs trusts as one-size-fits-all form trusts. We try to create a customized special needs trust that is tailored to a client’s goals. But to do that, we need to ascertain your goals, the SNT beneficiary’s circumstances, and how you want the SNT to be spent.

Sometimes special needs trust design may be geared to a parent’s wishes while in other cases. we may design an SNT around the beneficiary’s intent. For instance, an estate planning SNT should implement the wishes of the person who will fund the special needs trust. In contrast, the wishes of the SNT beneficiary may be paramount where the SNT will receive the disabled beneficiary’s medical malpractice or worker compensation settlement.

For example, where an SNT beneficiary is high-functioning and can live safely in the community, the special needs trust probably should be allowed to fund the SNT beneficiary’s housing. In contrast, funding independent living would not be an important consideration when drafting an SNT for a beneficiary who is severely disabled and can’t live independently.

Likewise, we need to know the planned SNT funding source. Drafting a special needs trust that receives gifts from the beneficiary’s family involves different requirements than an SNT to be funded with the beneficiary’s own lawsuit settlement.

We can work with you or your personal injury, medical malpractice, or worker compensation lawyer to gather the necessary information, then create a custom trust tailored to your individual goals and expectations.

Who should serve as trustee of a special needs trust?

The most important considerations are that the SNT trustee be trustworthy, reasonably intelligent, able to keep good records, and likely to take trustee responsibilities seriously. FriedmanLaw and other advisors can explain government benefit rules and help a trustee properly administer the SNT. However, we can’t force a trustee to keep good records or consult professionals when questions arise. Serving as SNT trustee involves serious responsibilities. If the trustee fails to administer an SNT correctly, the beneficiary may lose benefits and have to repay the government and the trustee can incur liability.

Since an SNT trustee has great discretion, naming the SNT beneficiary or spouse as SNT trustee can jeopardize eligibility for means-tested benefits. Parents, adult children, and other family members can make good trustees as long as they are responsible, trustworthy, and have some familiarity with managing finances.

An SNT trustee is entitled to a fee, although family members often waive it. The trustee can hire lawyers, accountants, financial advisors, and other professionals at the trust’s expense to help the trustee administer the trust..

In some cases (especially with large trusts), a bank, lawyer, or other professional trustee may be a good choice. Non-profits also sometimes serve as trustee.

Managing a large SNT, particularly a first-party SNT, is a big responsibility and carries substantial obligations. The trustee must invest wisely, satisfy tax considerations, comply with laws governing Medicaid and other means-tested benefits, etc.. Many people, who have their own families and lives to manage, don’t have the time or specialized knowledge that the task requires.

How should the trustee administer the special needs trust?

To keep your special needs trust from knocking you off means tested aide, the trustee must make sure that you can’t access or obligate the trust yourself. The trustee can decide to pay for things you may want, but the trustee must have ultimate control. The trustee also has to ensure that trust expenditures are to benefit you rather than others. It’s okay if others are helped incidentally, but each expenditure must be primarily to help the beneficiary.

The trustee must also handle trust taxes and invest trust assets in a reasonably prudent manner. For first-party SNT’s, the trustee must also comply with state reporting requirements. In addition, there are rules on how first-party SNT’s may spend money, to which the trustee must adhere. (For example, a first-party (d)(4)(A) SNT may only pay costs on a house if it owns part of the property.)

FriedmanLaw is here to guide you with administering a special needs trust.

Medicaid Payback

When the beneficiary of a first-party SNT dies, the trustee is required to repay all Medicaid expenditures for the beneficiary that haven’t already been repaid. The SNT trustee must obtain the Medicaid demand and repay Medicaid before distributing the SNT to anyone else, including the beneficiary’s family.

However, you can’t get blood from a stone. Often, the Medicaid payback amount will be more than the special needs trust remainder (i.e. the amount left in the trust). In that case, Medicaid need be repaid only the SNT remainder.

This can get tricky when a special needs trust owns certain assets like real estate. If a beneficiary lived with family in a house owned by a first-party SNT, the trust may be obligated to apply the home to repay Medicaid. However, experienced counsel may negotiate with Medicaid to let the family remain in the home for a reasonable time period.

FriedmanLaw can work with you to satisfy Medicaid payback obligations. We can deal with the state, review expenditures to make sure they are recoverable, and negotiate payback terms where appropriate.

Are All Special Needs Trusts Subject to Medicaid Payback?

ABSOLUTELY NOT!!!

Like all trusts, a special needs trust is governed by its trust agreement. Therefore, an SNT must repay Medicaid if called for in the SNT agreement. If the SNT provides for Medicaid repayment, the trustee must comply.

Medicaid and Supplemental Security Income (SSI) law provide that a first-party special needs trust disqualifies the beneficiary for Medicaid and SSI unless the SNT provides that amounts still in the SNT when the beneficiary dies must repay the beneficiary’s Medicaid. Certain other kinds of SNTs funded by a third-party (Grantor) to qualify for Medicaid or SSI also must include Medicaid repayment provisions. Thus, a special needs trust that contains amounts attributable to the SNT beneficiary (and in some cases the beneficiary’s spouse) or is funded by a third-party grantor to obtain Medicaid must contain Medicaid repayment provisions.

Other SNTs are not required to provide for Medicaid repayment. Therefore, a third-party SNT that isn’t intended to qualify a Grantor for Medicaid or SSI need not provide for Medicaid payback. Consequently, typical SNTs funded by a parent, grandparent, or sibling of the disabled person through estate planning don’t have to contain Medicaid repayment provisions. Nevertheless, even if a third-party SNT isn’t required to provide for Medicaid repayment, Medicaid repayment terms mistakenly included in the SNT can be enforced. That bears repeating.

A typical estate planning third-party special needs trust need not call for Medicaid repayment. Nevertheless, if your lawyer drafts your third-party SNT incorrectly, the lawyer can force the SNT to repay Medicaid unnecessarily!

Unfortunately, it happens– especially when lawyers draft SNTs from forms without understanding the ins and outs of SNT law. That’s an excellent reason to work with counsel experienced in special needs trust planning. You can be seriously harmed if your SNT is drafted by someone who hasn’t scaled the steep learning curve associated with SNT law. Make sure your third-party SNT doesn’t take on the obligation to repay Medicaid due to your lawyer’s inexperience.

Glossary

SNT – Special needs trust, a legal instrument that helps people with disabilities set aside money without losing public benefits

First-party SNT – a SNT that contains money belonging to the beneficiary (or possibly the beneficiary’s spouse), such as a lawsuit award or settlement

Third-party SNT – a SNT that contains money belonging to someone other than the beneficiary and his/her spouse, such as a gift or inheritance from a parent

Trustee – the person who manages the trust money

Beneficiary – the person with disabilities on whom the SNT money is spent

Remainder – the amount left in the trust when the beneficiary dies