The Top Questions We’re Asked...

Author: Wolfe Ossa LawCategories: Elder Law

Top Special Needs Trust (SNT) Questions

Here are some general answers to the most common questions we’re asked by clients when evaluating the creation of a Special Needs Trust or SNT.

 

  1. What is a Special Needs Trust?

A Special needs trust allows a person with a disability 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 government benefit programs.

As their name implies, special needs trusts are designed not to provide basic support, but instead to pay for items and services that could not be paid for by public or private benefit programs. These trusts typically pay for things like leisure activities, hobbies, recreation, counseling, camp, and other items beyond the simple necessities of life. (However, the trustee may use trust funds for other needs if the trustee decides doing so is in the beneficiary’s best interest.)  Special needs may include some medical and dental expenses, necessary or desirable equipment (such as accessible vehicles), training or specialized education, additional insurance, transportation, and modifications to a home. If the trust is sufficiently funded, the trustee may purchase electronic equipment and appliances, computers, vacations, movies, may pay a companion, and make other financial decisions which improve self-esteem.  These are called quality-of-life enhancements.

Often, special needs trusts are created by a parent or other family member for a child with a disability (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up alone with a will as a way for an individual to leave assets to a relative with a disability. In addition, the individual with the disability may create a 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.

  1. Can a SNT buy a house?

Yes.  A Special Needs Trust can buy a house and there are often good reasons to do so.  However, there are some strict rules under SSI law and under New Jersey Medicaid regulations that must be considered before making that decision.

  1. Can a SNT buy a vehicle?

Yes.  A Special Needs Trust can buy an automobile or a van.  A SNT can also pay for modifications to a vehicle, or for insurance and maintenance.

  1. Can a trust pay for vacations?

Yes.  A Special Needs Trust can pay for vacations, but there are guidelines about using trust funds to pay for a vacation that includes other family members.

  1. Can a special needs trust pay parents for the care of a child?

In New Jersey it is very difficult for a Special Needs Trust to pay parents for the care of a child.  This is because the assets of a Special Needs Trust under New Jersey Medicaid regulations cannot be used to discharge a parental obligation of support or to supersede Medicaid programs.   If the child is over 18, then the parent may be paid for the care of an adult child through PPP or another government benefit program.  Recent changes in social security regulations have made payments to parents for care much more rigorous and challenging.

  1. Who gets the assets left in the special needs trust on the death of the beneficiary?

Under Federal law for one type of SNT, the State Medicaid Agency must be paid back for any benefits paid to the beneficiary of the Special Needs Trust.  If there are assets remaining after repayment to Medicaid and DDD, they go to the intestate heirs.  Not so with a Supplemental Needs Trust.  There is a no pay back requirement. The trust creator can direct all trust funds remaining to whatever beneficiaries he or she designates.

  1. Does a person on SSD need a special needs trust?

SSD carries with it Medicare.  Neither SSD nor Medicare is means tested. However, there are often other reasons why a person on SSD might need a Special Needs Trust.  For example, if the person collects SSD based on a parent’s work history (a “DAC”) and receives DDD or Medicaid benefits (such as residency placement), a third-party Special Needs Trust should be considered. The answer is therefore more difficult and requires more discussion and analysis.

  1. Can a special needs trust distribute cash to the beneficiary?

Any cash distributed by a Special Needs Trust to a beneficiary will reduce his or her SSI payment dollar for dollar.  If the SSI payment is eliminated, Medicaid will be lost.  It is not good practice for a trustee of a Special Needs Trust to distribute cash.  Cash payments to SSI beneficiaries should never be done.  It’s a landmine that can blow up public benefit eligibility.

  1. Are Special Needs Trusts subject to taxes?

There may be income, gift and estate tax considerations in establishing and administering a Special Needs Trust.  These must all be carefully considered.

  1. Who is a good choice to serve as a trustee?

That’s a simple question but requires a complex answer.  Sometimes it’s best not to have a family member serve as a sole trustee of a Special Needs Trust.  The combination of a family member and a professional trustee is often a good arrangement. Selecting a trusted family member especially if they are age appropriate and trustworthy, is also a viable option. Picking the right trustee is really important.

  1. How can I protect a special needs trust from those who prey on vulnerable persons?

Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts, you decide who has access to the information about your children’s inheritance. This protects your child and other family members, who may be serving as trustees, from predators.  There are several legal safeguards built into a Special Needs Trust to add further protection for a loved one.

  1. Can others contribute to my child’s special needs trust?

Yes, they can. 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. We will give you a letter to share with family explaining what you have done.  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.

  1. Why is it important to have an attorney who is knowledgeable in special needs trusts?

It is important that a special needs trust not be unnecessarily rigid and generic. An attorney with knowledge of SNTs and Medicaid rules can help protect a beneficiary.  An attorney without special needs experience may not know how to 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 other family beneficiaries upon the special needs child’s death. While “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your family hundreds of thousands of dollars, or more.

  1. Why not just disinherit a child with a disability?

Many people with disabilities rely on SSI, Medicaid or other government benefits to provide food and shelter. You may have been advised to disinherit your child with a disability – the child who needs your help most – to protect that child’s access to government 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 access to governmental benefit programs to meet their basic needs, you should consider establishing a special needs trust.

  1. How do I 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. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical and cares about your family member.

  1. Can I create a special needs trust 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 government benefit programs. 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 an individual under age 65 with a disability 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, then DDD (if applicable).

Medicaid and SSI law also permit “(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 may not have to be repaid for its Medicaid expenses on his or her behalf if 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 may be 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.

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