Special Needs Trusts: Peace of Mind for When You Are Gone

Introduction
Many families across the nation have a disabled child, or other dependent, with special needs. These parents, like you, are most concerned with what will happen to their child when they die. Many do not realize that providing for a disabled child in a Will can run the risk of terminating, or rendering their child ineligible for, government benefits that are means-tested.  Other parents choose to simply disinherit the disabled child with the understanding that his or her siblings or other relatives will provide for him or her. The risk involved with this choice is that any money left to the siblings or relatives is open to attack by that person’s creditors or could be subject to equitable distribution in a divorce. A Special Needs Trust can give you the opportunity to provide care and financial stability for your child without jeopardizing the government benefits that your son or daughter may be receiving.

What is a Special Needs Trust?
In order to adequately explain a Special Needs Trust, it is necessary to define a few terms commonly used in trust law. The grantor (also known as the creator or settlor) of a trust is the person whose assets are used to fund the trust. The trustee is the person who holds legal title to the trust assets; however this does not mean that those assets become property of the trustee. The trustee merely holds title to the assets “in trust” for the benefit of your child and administers the trust according to the terms set forth in the trust document. He or she can only use the trust funds for the benefit of another, who is called the beneficiary. In the case of a Special Needs Trust, the beneficiary would be your disabled child. The trustee and the beneficiary are chosen by the grantor.

In legal terms, a Special Needs Trust is a discretionary, spendthrift trust. It is administered by the trustee according to very strict guidelines laid out in the trust document. Its purpose is to supplement, but not to replace, any government benefits that the beneficiary is receiving or may receive in the future. For example, a Special Needs Trust can be used to pay for any special equipment not covered by Medicaid or Medicare, vacations and other recreational activities, educational expenses, companionship and any other comforts or necessities that your child may need.  

How Are Government Benefits Involved?   
There are many government programs that provide benefits for disabled individuals. Some are means-tested, which means that the amount of benefit given, if any, is based on the amount of the individual’s available resources. Others are not means-tested, and are often insurance programs.  Eligibility for the latter is not dependent on the individual’s available resources. Medicaid, SSI and Section 8 Housing are all examples of means-tested government programs. Medicare and SSD are insurance programs, and therefore are not based on the income and available resources of the individual.

An inheritance received by a disabled person through a regular trust, a Will or intestacy (dying without a Will) counts as available income and/or resources for determining eligibility for means-tested benefits. The inheritance is considered “available” because the individual has the right to immediate access and control of those assets. Disclaiming the inheritance is not a remedy for this situation because the law does not allow a person receiving government assistance to disclaim a gift in order to qualify (or continue to qualify) for benefits.

A Special Needs Trust renders those same resources “unavailable” to the individual for the purposes of government benefits, while still providing for his or her financial needs.

Only means-tested benefits are affected by an outright bequest to a disabled child or dependent. Therefore, if a disabled person is only receiving Medicare and SSD, then a Special Needs Trust may not be necessary because these benefits will not be affected by an inheritance. It should be noted however, that an inheritance may affect the disabled person in the future should they come to need SSI, Medicaid, or other mean-tested benefits.  If the disabled child or dependent is already receiving means-tested benefits, or is likely to need them in the future, then a Special Needs Trust may be worth pursuing.

How is a Special Needs Trust Different from Other Trusts?  
With an ordinary trust, the beneficiary usually has the right to receive income payments and/or distributions from the principal on a regular basis. Such income and/or distributions are considered available resources of the beneficiary because he or she can demand these payments from the Trustee as a matter of right.

A Special Needs Trust does not provide the beneficiary with any rights to income or principal distributions. The Trustee, in his or her sole discretion, can determine when payments are made, however the trust funds may only be used for the benefit of the beneficiary. Money from the trust is never distributed to the beneficiary directly; it is only distributed to third parties for the beneficiary’s benefit. For example, a Special Needs Trust beneficiary needs a special wheelchair and Medicaid will not cover the cost. If the Trustee gives money directly to the disabled beneficiary in order to buy the wheelchair, then that money would be considered income to the beneficiary and could jeopardize his or her benefits. However, if the Trustee pays for the wheelchair with trust money given directly to the vendor, and not the beneficiary, it is not considered available income. It is in this way that a Special Needs Trust can provide for the beneficiary’s needs without putting government benefits at risk.

How is a Special Needs Trust Created?
There are two kinds of Special Needs Trusts: Self-Settled and Third Party. Self-Settled Trusts are highly regulated by federal and state law, and there are many strict requirements that must be met in the trust language and administration. A Third Party Trust is considerably more flexible.

A Self-Settled Trust is funded with the assets of the disabled person and is commonly used when the disabled person receives money in a personal injury action. It can only be established on behalf of the disabled beneficiary by a parent, grandparent, guardian or court, and the disabled beneficiary must be under the age of 65. Even though it is established by someone else, the disabled person is still considered the grantor of the trust because the assets used to fund it belong to him or her. It must be an inter vivos trust (created during life) and it must be irrevocable. A Self-Settled Trust also requires that the disabled person be the only beneficiary. Upon the beneficiary’s death, the remaining trust funds must be used to payback Medicaid for any benefits received.  Any money left over after paying back Medicaid must pass through intestacy to the disabled beneficiary’s heirs. Other family members or friends can put money or assets into the trust, however once the beneficiary reaches the age of 65 additions to the trust are no longer allowed.

A Third Party Special Needs Trust is considerably more flexible because it is not regulated by any federal laws. This type of trust is created and funded by a third party, typically a parent, for the benefit of the disabled person. Like a Self-Settled Trust, other friends or relatives may also contribute funds to the trust. However, this trust can never be funded in any part with the disabled person’s own assets. There is no age restriction as with a Self-Settled Trust, and there is no requirement to pay back Medicaid. It may be revocable or irrevocable, though it is usually irrevocable for estate tax reasons. It may be created during life or through a Will. A Third Party trust may have remainder beneficiaries of the grantor’s choosing, to whom the trust funds would be distributed upon the disabled beneficiary’s death. A Third Party Trust can also be a useful tool for reducing or eliminating estate taxes (for more information on this issue, please contact our office).

Both a Self-Settled Trust and a Third Party Trust require that the disabled beneficiary meet the Social Security Administration’s definition of “disabled” before the trust is implemented. With both of these types of Special Needs Trusts, payments must never be made directly to the disabled beneficiary, and the Trustee must have complete discretion over the use of the trust funds. Both trusts must not use the trust funds to provide food or shelter for the beneficiary, because doing so will result in a reduction and/or elimination of benefits.

Conclusion
While government benefits are essential for providing a disabled person with necessary medical care, food, and shelter, they are rarely enough to cover all of that person’s basic needs. Parents are left with few options for providing for their child’s financial future without jeopardizing his or her eligibility for government benefits. A properly drafted Special Needs Trust can give you peace of mind by ensuring that your disabled child or dependent will be adequately provided for when you are gone.