Special needs trusts (also known as "supplemental needs" trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining eligibility for public benefits.
Under current Federal law, any inheritance of more than $2,000
disqualifies individuals with disabilities from most federal
needs based assistance, including Supplemental Security Income
(SSI) and Medicaid. Benefits from state public assistance
programs may also be affected.
As their name implies, special needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing, and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.) Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (such a specially equipped vans), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses.
Often, special needs trusts are created by a parent or other family member for a child with special needs (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These "self-settled" trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.
Why not Just Disinherit a Child with Special Needs?
Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. You may have been advised to disinherit your child with special needs - the child who needs your help most -- to protect that child's public benefits. But these benefits rarely provide more than subsistence. And this "solution" does not allow you to help your child after you are incapacitated or gone.
When your child requires or is likely to require governmental assistance to meet their basic needs, you should consider establishing a special needs trust.
Can a disabled person create a special needs trust with their own funds and still be eligible for Medicaid and SSI?
Each public benefits program has restrictions that the special needs trust must comply with in order not to jeopardize the beneficiary’s continued eligibility for public benefits. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two "safe harbors" permitting the creation of special needs trusts with a beneficiary's own money if the trust meets certain requirements.
The first of these is called a "payback" or "(d)(4)(A)" trust, referring to the authorizing statute. "Payback" trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary's death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary's behalf.
Medicaid and SSI law also permits "(d)(4)(C)" or "pooled trusts." Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual special needs trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary his- or herself. In addition, at the beneficiary's death the state does not have to be repaid for its Medicaid expenses on his or her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.
A trust can hold cash, stocks, personal property, and real
property. It can own and/or be the beneficiary of life
insurance. Special Needs Trusts also can be used to protect
personal injury settlements or judgments from jeopardizing
government benefit eligibility. Most importantly, Special Needs
Trusts can help parents coordinate their estate plans and provide
peace of mind that their child will be provided for.
What Expenses Can't a Special Needs Trust Pay for?
Special needs trusts are designed to supplement, not replace, the kind of basic support provided by government programs like Medicaid and Supplemental Security Income (SSI). Special needs trusts pay for comforts and luxuries -- "special needs" -- that could not be paid for by public assistance funds.
This means that if money from the trust is used for food or shelter costs on a regular basis or distributed directly to the beneficiary, such payments will count as income to the beneficiary. This can affect eligibility for government benefits like Medicaid and SSI. One of the trustee's most important jobs is to use discretion in making distributions from the trust so as not to jeopardize the beneficiary's eligibility for these government benefits.
If the beneficiary receives SSI, here are some basic expenses that should not be paid through a special needs trust without consultation with a special needs attorney.
- Cash given directly to the beneficiary for any purpose
- Food or groceries
- Restaurant meals (except if given as an occasional gift)
- Rent or mortgage payments
- Property taxes
- Homeowners or condo association dues
- Homeowners insurance if the insurance is a mortgage requirement
- Utilities such as electricity, gas, and water
- Utilities hookup or connection charges
However, many of these payments will only cause a one-third reduction in SSI benefits. The trustee may determine that the benefit of the trust making these payments far outweighs the loss of income.
Will trust income affect SSI eligibility?
Under current Federal law, any inheritance of more than $2,000 disqualifies
individuals with disabilities from most federal needs based assistance,
including Supplemental Security Income (SSI) and Medicaid. Benefits from
state public assistance programs may also be affected. Of course this law
varies from country to country, so it wouldn't hurt to read more about this
and other personal financing concerns on websites specializing on trust
funds and loans advisory. Here are some more info pertaining to trusts.
Income paid from a special needs trust to a beneficiary will reduce SSI benefits by one dollar for every dollar paid to him or her directly. In addition, payments by the trust to the beneficiary for food or housing are considered "in kind" income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such "in kind" income. Some attorneys draft the trusts to limit the trustee's discretion to make such payments. Others do not limit the trustee's discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future. The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.
How Do You Choose a Trustee?
Choosing a trustee is one of the most important and difficult issues in special needs trusts. The trustee must have the necessary expertise to manage the trust, including making proper investments, paying bills, keeping accounts, and preparing tax returns. A professional trustee will have these skills, but may be unfamiliar with the beneficiary and his unique needs. For those who may be uncomfortable with the idea of an outsider managing a loved one’s affairs, it is possible to simultaneously appoint both a professional trustee and a family member as co-trustees. It's also possible to hire a trust "protector," who has the power to review accounts and to hire and fire trustees, and a trust "advisor," who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may not be interested. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical.
How can I fund a special needs trust?
A parent with a child with special needs should consider buying life insurance to help fund the special needs trust set up for the child’s support. What may look like a substantial sum to leave in trust today may run out after several years of paying for care that the parent had previously provided. The more resources available, the better the support that can be provided the child. And if both parents are alive, the cost of "second-to-die" insurance -- payable only when the second of the two parents passes away -- can be surprisingly low.
Can others contribute to my child's special needs trust?
One key benefit of creating a trust now is that your extended family and friends can make gifts to the trust or include the trust in their estate planning. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low. In these cases, the special needs trust should be irrevocable rather than revocable.
Why is it important to work with an Attorney who specializes in Special Needs Trusts?
It is important that special needs trusts not be unnecessarily inflexible and generic. Although an attorney with some knowledge of trusts can protect almost any trust from invalidating the child's public benefits, an attorney without special needs experience may not customize the trust to the particular child's needs, and the child may not receive the benefits that the parent provided when they were alive.
Another mistake attorneys without special needs experience make time and time again is putting a "pay-back" provision into the trust rather than allowing the remainder of the trust to go to others' upon the special needs child's death. While these "pay-back" provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your family hundreds of thousand of dollars, or more.
How Do I Choose the Right Attorney To Work With?
Planning for the future of your child or other family member with special needs cannot be more important to you. Finding the right attorney to help you in this process is vital to the success of your efforts. So, where do you start?
Step One: Compile Your List
Get a list of names of potential candidates. The first place to go in compiling your list is word of mouth. Ask other parents of children with special needs who they’ve used and who they like. If you are working with a service organization, ask its staff or volunteers who they would recommend. If you know or work with a professional such as a financial planner, accountant, or attorney with another specialty, ask for their advice.
The second source of candidates is the Internet.
Step Two: Investigate
Once you have your list of possible attorneys, investigate them. You can do this by looking at the attorney's Web site to see what they say about their special needs planning practice. Is this a core part of their law practice, or simply an additional service they offer? As with any other skill, the more experience an attorney has in a particular specialty, the better she’ll be at it. See how long the attorney has been practicing disability and special needs planning. Finally, in terms of investigation, check the Web site of your state bar disciplinary agency to make sure that the attorneys on your list have not been disciplined.
Step Three: Call
With your investigation complete, you should have narrowed down the field to at most three or four attorneys. Your third step is to call the offices of these “finalists.” Ask the same questions: Are they members of any professional disability organizations? What is their experience in special needs planning? What is their approach to representing clients? The attorney herself should be able to answer these questions.
Step Four: Meet
After your call, you should be down to one favorite attorney and perhaps some alternates. Your next step is to schedule a consultation with your first choice. If the meeting goes well, you have picked your special needs planning attorney. If not, you can schedule one or two meetings with the runners-up to see if they are a better fit.
Don’t meet with more than three attorneys. The goal of all of the preparation described above is to find the right attorney for you at the first meeting. But if you’ve met with three attorneys and none of them is a good fit, then the problem may not be with the attorney, but with your expectations about what attorneys can and cannot do and how they should respond to you. Remember: not planning at all is much worse than having to reassess your approach to special needs planning in general.
The law firm of Sheri R. Abrams, P.C. can assist parents,
family members or friends establish a Special Needs Trust, during
their lifetime or by a Will, for a disabled person without risking
that person's eligibility for public benefits.
The law firm of Sheri R. Abrams, P.C. can also establish an
Special Needs Trust for the benefit of a disabled person using
that person's own funds-----without incurring a penalty period