PART III - What is a Trust and What is a Special Needs Trust?

In its most basic form a Trust is a legal document containing instructions directing the management and distribution of the resources placed in the Trust.  The person creating or funding the Trust is the Grantor.  The person who receives the benefit or on whose behalf the Trust was created is the Beneficiary.  The Grantor appoints a Trustee, which is a person or entity (such as a bank) that will manage the Trust and distribute the Trust’s funds for the benefit of the Beneficiary.  Trusts are used for a variety of purposes in estate planning and are of particular importance in Special Needs Estate Planning.

The Statute that made the Difference

In 1993, while closing various loopholes that permitted individuals to easily qualify for Medicaid by transferring their property to trusts, Congress created exemptions under the Omnibus Budget and Reconciliation Act for trusts created for the benefit of individuals with disabilities.  

Located in Title 42 of the United States Code Section 1396p(d)(4), the statutes provide that if a trust meets the U.S. Code requirements, then the trust is not a countable resource for SSI and Medicaid qualification purposes.  Neither will a transfer of assets to a d(4)(A) trust give rise to a period of ineligibility for either SSI or Medicaid.

Requirements for a self settled trust that is exempt under 42 U.S.C. Sec. 1396p(d)(4)(A) include:

·        The trust beneficiary must be an individual under the age of 65 who qualifies as "disabled;”

·        The trust must be established by a parent, grandparent, guardian, or court;

·        The trust must provide that at the individual’s death, the State is repaid for the Medicaid services that it has provided during the individual’s life.

The self-settled trust though established up by a Parent, Grandparent, guardian or the court is funded with the money or resources belonging to the beneficiary.

Do all special needs trusts have the "payback-the-State" requirement?  NO.  Just self-settled trusts.

Note:  Under this exemption  a Third Party Special Needs Trust can be set up and funded by anyone on behalf of the disabled individual with resources not belonging to or owned by the beneficiary.  The person establishing the trust must have no legal obligation to support the disabled individual.  Third Party trusts are NOT required to have a payback provision.

Illustration: If a Parent sets up the trust with proceeds awarded to the child from an insurance settlement or from an inheritance (the beneficiary’s own funds), then this is a self-settled or first party trust and would require a payback clause. 

If on the other hand, an uncle sets up a Special Needs Trust with his own funds for the benefit of his nephew who is disabled.  That is a third party trust and does not require a payback clause. 

This is just another example of how planning carefully maximizes value.

Why Special Needs Trusts Are Important

They protect government benefits eligibility - The Special Needs Trust allows an individual with disabilities to have funds available for his or her benefit without the funds counting as a financial asset for benefit eligibility purposes

They protect the opportunity to access superior care and services options - Even where a beneficiary never needs Federal or State public benefits and services (which is very rare, but does happen) consider the special life management needs he or she still has, and use a SNT as part of a comprehensive plan to meet those needs in an organized manner.

Without Special Needs Trusts many individuals with disabilities would be relegated to subsistence living and have access to fewer opportunities and options.  They have a typically greater disparity between income potential and the outflow (expenses).  They have higher medical care costs and may need special equipment.  Transportation is going to be more expensive, and might need special help with even the most basic tasks.  Public benefits are almost always vital for basic needs or as a safety net.

 Putting it all together, what is a Supplemental Needs Trust?

A Supplemental Needs Trust is a special kind of trust which holds title to property for the benefit of a child or adult who has a disability.  The funds in the Trust can be used to supplement benefits received from various governmental assistance programs including SSI and Medicaid.  A special needs trust will manage a variety of resources for the benefit of the injured or disabled person while maintaining the person’s eligibility for public assistance benefits.

·        A Supplemental Needs Trust is, first of all, a Trust for the benefit of an individual under the age of 65 who qualifies as being "disabled;”

·        The Beneficiary has no direct control or access to funds in the Trust;

·        A Trustee manages the trust and has broad discretion to make distributions on behalf of Beneficiary according to trust distribution directives.

Result: Trust assets do not count against the beneficiary's resources or assets.

As an essential component of a comprehensive care plan, the well-designed Special Needs Trust (SNT) will, at the same time:

·        Protect public benefits - The Special Needs Trust puts a middle step between the money or resources, and the person with a disability.  Assets in trust do not count as resources to the individual with special needs and thus preserves eligibility for public benefits such as SSI and Medicaid.

·        Protect the quality of care - A well-designed Special Needs Trust provides for vastly superior care options and opportunities for treatment and rehabilitation, housing, electronic equipment, computers, job training, vacations etc.  Supplemental items that will enhance dignity, productivity and comfort

Whatever the extent of your resources, preparing and executing a good Special Needs Estate Plan will make more effective use of those resources.

Planning for the future security of a loved one with special needs can seem a daunting task, but it is essential to take action now!

The first step is to find a competent attorney and/or financial planner.  Special Needs Trusts must comply with complex federal and state laws to be effective, and although your unique input is absolutely necessary, your attorney should draft the document.

 As always, feel free to contact our offices at (585) 235-0980 to discuss any questions or comments.  Also, visit our website at www.CiminelliLaw.com.