Special People Require Extra Planning
By: Amos Goodall
Many families have members with special needs. Careful planning can provide assets for their benefit without jeopardizing support. More importantly, this provides a structure to help the disabled person when other family members are gone. This is called a special needs trust.
A special needs trust is a type of trust intend to provide financial support without causing the beneficiary to lose public benefits. Usually, these permit Supplemental Security Income and Medicaid recipients to get additional services or goods.
Some lawyers prefer to use the term “supplemental benefits” rather than “special needs.” They are interchangeable and describe the purpose of the trust rather than being a limiting term.
Anyone can establish a special needs trust, but there are two general categories: third-party and self-settled. A third-party needs trust can be established by one person for the benefit of another. The person establishing the trust chooses to make his or her assets available for the benefit of the disabled beneficiary. Third-party special needs trusts are often established, for example, by parents, grandparents and others for their developmentally disabled or mentally ill children.
Third-party Trusts
There are actually few regulations expressly governing third-party special needs trusts. Because the beneficiary was never entitled to the money in the trust, the most important rule is simple: The trust terms should not create any entitlement to either income or principal. If the trustee has complete discretion whether to make distributions for the beneficiary, the trust principal and income will usually not be counted as available.
The general rule for special needs trusts is that the trust may not provide food, shelter or any asset that could be converted into food or shelter (including cash). The trust can provide for physical therapy, medical treatment, education, entertainment, travel, companionship, clothing, furniture and furnishings (such as a television or computer) and some utilities (including cable television and a telephone, but not electricity, gas or water). Distributions of cash are almost never permitted (though even this rule may have some exceptions). It is also important to grant the trustee some discretion to determine if it is occasionally appropriate to make distributions even if deemed the equivalent of food or shelter in limited circumstances.
Under special circumstances, a special needs trust can be used to purchase a home or pay rent for the beneficiary. There are special rules affecting the use of special needs trusts (or any third-party payment) for shelter. Those rules are difficult to navigate and depend heavily on the beneficiary’s situation. Secure competent legal advice before making any decision about the provision of shelter.
Self-settled Trusts
The more difficult situation is a trust using the beneficiary’s own assets, called a self-settled trust.
Sometimes, a public-benefits recipient may get assets that prevent continued eligibility, such as a personal injury settlement or inheritance. (If the person giving the inheritance had created the trust before death, it would have been governed by the more liberal standards of third-party trusts.) In such a case, it may be possible to place assets into a special needs trust to continue or regain eligibility for benefits.
Self-settled special needs trusts are much more complicated then their third-party equivalents. Usually, a self-settled special needs trust must comply with a federal law first enacted in 1993. This requires that most self-settled special needs trusts actually be established by a judge, a court-appointed guardian or the parents of grandparents of the beneficiary (Social Security regulations may limit the creation of trusts to the first two categories in most circumstances).
The court in Centre County has reviewed and approved a number of these trusts. In addition, most self-settled special needs trusts will have to include a provision repaying the Department of Public Welfare for any benefits, with any assets remaining at the death of the beneficiary, called a “pay-back” provision. From time to time, the Department of Public Welfare has made objections to expenditures from these trusts, even though the trustee believed that the expenditure was perfectly appropriate for the beneficiary.
Absent unusual circumstances, only self-settled special needs trusts require a provision repaying the state for Medicare benefits.
While the principles involved in third-party special needs trusts are simple, there are many choices involved in the actual drafting of a trust. In addition, administration of a special needs trust can be extremely difficult. A seasoned lawyer familiar with public benefits programs and special needs trust provisions should always be involved in preparation of a third-party special needs trust.
While many legal matters can be undertaken without a lawyer or with a lawyer with a general background, special needs trusts are complicated enough to require the services of a specialized practitioner.