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Special Needs Trusts

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Special Needs Trusts and How They Are Used?

Special Needs Trusts are often established in conjunction with structured settlements for the placement of settlement funds from personal injury or medical malpractice judgments. Special Needs Trusts (SNTs) enable beneficiaries to retain their Medicaid and SSI benefits and, congruently, have funds available for his/her needs not covered by government or public assistance. The settlement funds would typically be used for continuing medical care. However, with a Special Needs Trust these funds are not counted as income or assets for the purpose of SSI and Medicaid eligibility, thereby indemnifying beneficiaries from losing their public assistance.

Special Needs Trusts are not designed or intended to provide basic support for the beneficiary, rather afford amenities that cannot be provided by public assistance funds. These trusts typically allow for luxuries above and beyond what is offered through public coverage or assistance. The special needs of the individual can include medical and dental expenses not offered within a public system, equipment which aids in the care of the beneficiary (specially designed vans, wheelchairs, etc…), training and education, insurance, transportation or essential dietary needs. If the trust is adequately designed, the beneficiary can also receive items which are considered quality-of-life enhancing expenses.

Often, Special Needs Trusts are created by a parent or another family member for a child with special needs. Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled child or relative. With certain trusts, the disabled individual can establish the trust relationship themselves, depending on the person’s age, competency and the program for which he or she wishes to receive benefits. This circumstance is frequently used 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.

Disabled Individual’s Trusts

The most well-known special needs trust as defined under statute 42 U.S.C. § 1396p(d)(4)(A), is also called a Type A Special Needs Trust; it is set up for one specific disabled individual.

What are the requirements of a Type A Trust?

  • An individual is considered disabled by Social Security standards. A person is disabled under Social Security rules:
    • If he cannot do work that he did before
    • If he cannot adjust to other work because of his medical condition(s)
    • If his disability has lasted or is expected to last for at least one year or result in death
    • For more information, go to: http://www.ssa.gov/dibplan/dqualify4.htm.
  • An individual is under the age of 65.
  • The trust must be established by a parent, grandparent, legal guardian or the Court.
  • The trust must be established for the sole benefit of the individual.
  • The trust must reimburse the state Medicaid agency for the medical lien accrued during the individual’s lifetime after the individual expires. Heirs can inherit the remainder of the settlement funds once the Medicaid lien is satisfied. Heirs are frequently included in trust documents.

Pooled Trusts

Pooled Trusts are similar to other Special Needs Trusts in that they allow the beneficiary to continue to receive SSI or Medicaid benefits. Pooled Trusts are defined under 42 U.S.C. § 1396p(d)(4)(C) and are also called Type C Special Needs Trusts. Pooled Trusts are run by non-profit organizations that administer the trust and serve as a trustee. In this capacity, it takes care of all the tax preparation and investment decisions. As the name implies, the funds in the trust are pooled for investment purposes, but individual accounts are maintained for the beneficiaries.

Pooled Trusts and Disabled Individual’s Trusts are administered in similar fashions. Both are sole beneficiary trusts, both require that the individual be disabled and both have similar payback provisions to Medicaid.

What is different about a Pooled Trust?

With a Pooled Trust (Type C), a person of ANY age may join. Whereas only people under the age of 65 can join a Disabled Individual’s Trust (Type A).

With an Individual Trust, the trustee can be Corporate or an individual. A Pooled Trust is a nonprofit organization and the trust funds are generally pooled for investment purposes (although individual accounts are maintained).

With a Pooled Trust, the non-profit agency has already established the trust and the beneficiary or her guardian may enter into an agreement under this existing document. With a Disabled Individual Trust, the documents must be drafted by an attorney and the cost varies, depending on the case.

However, with a Pooled Trust, at the end of a person’s life, the Medicaid payback provision applies and the nonprofit organization is allowed to keep the remainder of the funds in the trust for the benefit of the other disabled trustees (although a trustee can waive the right to retain the remainder of the funds and allow the heirs to inherit). With a Disabled Individual Trust (Type A), once the Medicaid payback is dispersed, the remaining funds can be inherited by the heirs of the trust’s beneficiary.

Pooled Trust funds are intended to allow for luxuries above and beyond what is offered through public coverage or assistance. As with Special Needs Trusts, funds are designed to provide for the special needs of the beneficiary, including medical and dental expenses not offered within a public system, equipment that aids in the care of the beneficiary (specially designed vans, wheelchairs, etc.), training and education, insurance, transportation, and other acceptable trust expenses.

Special Needs Trusts and Corporate Trustees

Because the administration of a Special Need Trust (SNT) is highly labor-intensive, a corporate trustee, such as a bank, trust company or specialized law firm can best perform the tasks required for maintaining an SNT. Though it would appear that the logical choice for a trustee would be a parent, guardian, or other family members of the beneficiary, the responsibilities of an SNT are quite different from a family trust and most other trusts. The law in some jurisdictions specifically and intentionally precludes such persons from serving in that capacity.

A trustee takes on the liability of making all distributions properly so that the Medicaid recipient does not lose eligibility. For many reasons, a family member or friend may not have the ability to administer the trust properly without bias. Some family members are often the remainder beneficiary (heir) of the SNT upon the death of the original beneficiary and they might be tempted to short the beneficiary on disbursements to potentially help ensure that a larger fund is available after the death of the beneficiary. On the other hand, a family member trustee may be tempted to disburse money for things that will endanger the public benefits or trigger fraud charges by the government for their loved one because their emotions are involved. Either situation causes a conflict of interest and may not be in the best interest of the disabled individual or the family member trustee.

Using a corporate trustee avoids this concern and also ensures that the management of the SNT will not be interrupted by the incapacity or death of individuals who might otherwise serve as trustees. Selecting an appropriate trustee is critical to the effectiveness of any SNT, and many variables must be evaluated and considered in this regard, including the prior experience of the proposed trustee with administering an SNT and the relevant fee schedule that would apply to the SNT.

Most corporate fiduciaries charge an annual fee equaling a certain percentage of the amount of the trust’s principal value. This inclusive fee covers a variety of services, including investment advice, tax reporting, and bookkeeping. Also, it is extremely important to choose a trustee that has knowledge and experience in administering Special Needs Trusts, as the main goal is to maintain the disabled individual’s benefits. Multiple Federal agencies such as The Centers for Medicare and Medicaid Services, Department of Social Security Administration and Department of Children and Families all have very specific regulations that must be taken into consideration to keep eligibility for public benefits and programs.

What assets can be placed into a Special Needs Trust?

Just about any asset can be used to fund a Special Needs Trust (SNT). Family savings, military benefits, and other government or public benefits for which a beneficiary is designated can be used. Real property, investments, stocks, Certificates of Deposit, and Individual Retirement Accounts (IRA’s) can also be put into the fund. Parents or family members can name the trust as a beneficiary in their wills as well as a life insurance policy naming the trust as its beneficiary. Third parties can also contribute to the fund, though money belonging to the beneficiary should not be put into the same fund as a third party funded SNT. Different rules apply to any balance of a trust funded by the beneficiary’s personal funds.

What expenses is the trust able to pay for?

It depends on the public benefits the individual is receiving. If the individual is receiving Medicaid, SSI, government housing and food stamps; the trust can typically pay for the following (or like kind):

    • Furniture
    • Electronics (computer, TV, stereos, security systems, etc.)
    • Cable , Internet access, phone, cell phone
    • Transportation (automobile, gas, transportation service)
    • Entertainment (movies, plays, theme parks, etc.)
    • Vacations and travel (for the disabled person and a caregiver)
    • Education (private school, higher education, music classes, art classes, dance classes etc.)
    • Medical not paid by Medicaid (Dentistry, Psychiatric Care, Physical Therapy, Cosmetic Surgery, etc.)

Equipment not covered by Medicaid (Special wheel chairs, car seats, specially equipped vehicles, etc.)

  • Prepaid funeral expenses
  • Other services provided to the individual

Entrusting a Family Member.

While entrusting money to a friend or family member may seem like a viable loophole but it is considered an illegal transfer by the Department of Medicare and Medicaid Services and Social Security. The illegal transfer would be considered fraud and is a serious offense.

Special Needs Trusts ensure that a disabled person’s funds are used solely for the disabled person’s benefit and keep the individual in compliance with government agencies and benefits.