SPECIAL NEEDS TRUSTS

What is a Special Needs Trust?

There are many types of trusts, and many reasons for creating a trust. In general, a trust is an entity created to hold or own certain assets, such as money, stocks, bonds, or real estate. The terms of the trust instrument (which creates the trust) should specify how trust assets are to be managed, including when and to whom the assets can be distributed. The trust instrument should also nominate a trustee to be responsible for administering the trust in accordance with the trust’s terms.

A Special Needs Trust is a type of trust designed to protect the assets of a person with a disability. To be eligible, as a beneficiary of a Special Needs Trust, the person must qualify as “disabled” as the term is defined in the Social Security Act. There are two types of special needs trusts – a “self-settled” Special Needs Trust and a “third-party” Special Needs Trust.

Self-Settled Special Needs Trust

A self-settled Special Needs Trust is an irrevocable trust funded with assets owned by the disabled individual, who will be the beneficiary of the trust. Typically, the individual received these assets directly as a result of inheritance, gift or lawsuit settlement. This type of trust can be established only for a disabled person less than 65 years of age. Only a parent, grandparent, legal guardian of the disabled individual, or a court can established a self-settled Special Needs Trust.

The self-settled Special Needs Trust must be managed by a trustee who is someone other than the beneficiary. The terms of the trust should direct the trustee to use the trust funds to supplement, but not replace, the public benefits received by the beneficiary. At the beneficiary’s death, the trust must provide that the state Medicaid agency be paid back up to an amount equal to the total medical assistance paid on behalf of the disabled individual. This is why a self-settled Special Needs Trust is often referred to as a “payback trust,” or a “Section (d)(4)(A) trust”.

Third Party Special Needs Trust

A third-party Special Needs Trust can be a revocable or irrevocable trust funded with the assets of a third party (the “grantor”) for the benefit of a disabled individual. However, upon the death of the grantor, a revocable trust becomes irrevocable. Unlike a self-settled Special Needs Trust, there are no restrictions on the age of the beneficiary and no Medicaid payback provision is required. A third party Special Needs Trust is often established by parents of a child with disabilities. However, other relatives or friends may also establish and/or fund the trust. These funds will then be used to enrich the life of the disabled individual while preserving his or her public benefits. A third-party Special Needs Trust may also be drafted to meet the requirements for treatment as a qualified disability trust, which could be advantageous for income tax planning.

Why create a Special Needs Trust?

When an individual who receives public benefits receives countable assets that put him or her over the asset limit, the public benefits (such as SSI or Medicaid) are often jeopardized. This situation may arise when the individual receives a personal injury award or an inheritance. Regardless of the source of the assets, the individual may be at risk of losing his or her public benefits once he or she owns the assets. However, if these assets are owned or held by a Special Needs Trust rather than the individual, the public benefits are maintained and protected. Trust assets can be used to purchase things that public benefits do not provide. Therefore, individuals with disabilities who receive public benefits will benefit from having funds in a trust used to maintain or improve their quality of life.

Trust Administration

The trust must be used solely for the benefit of the person with the disability. It is critical that the trustee be familiar with public benefits laws, investments standards, and the expectations for maintaining trust records because the public benefits received by the beneficiary may be reduced or eliminated if the trustee improperly spends trust assets.

Trust assets should be spent on things that cannot be obtained through public benefits and which, when purchased, will not jeopardize the benefits of the beneficiary. Therefore, a trustee should be familiar with the types of public benefits available, the actual benefits received by the trust beneficiary and the requirements of the public benefit programs.

Caution!

The public benefit rules and regulations are extremely complex. Special Needs Trusts must be drafted to adhere to those rules and regulations in addition to relevant tax law. You must be cautious when determining who will administer a trust of this type. The attorneys at Moertl, Wilkins & Campbell are qualified professionals who are willing and able to assist you with your Special Needs Trust preparation and administration.

Limitations and Disclaimer

To assist you, we have provided this brochure on Special Needs Trusts. This is not intended to be a complete explanation of the laws, rules and regulations affecting this brochure. The laws and rules often change and each individual’s situation is unique. The brochure will provide an initial understanding of the basic concepts. You should carefully evaluate your particular situation and consult the appropriate professionals or legal advisors prior to taking any action.