Special Needs Trusts

Special Needs Trusts (“SNTs”) are designed to help preserve the assets of people with disabilities without endangering their eligibility to receive public benefits.

People with disabilities who have more than a certain amount of available assets are not eligible to receive means-tested public benefits such as Medicaid and Supplemental Security Income (SSI). Disabled individuals who have available assets in excess of the applicable amount (“the Asset Limit”) must often deplete the assets to the requisite level before they can qualify to receive public benefits.

Fortunately, assets held for the benefit of a disabled individual in a properly created and administered SNT will generally not count towards the individual’s Asset Limit and therefore do not affect the individual’s ability to receive public benefits. These assets can be used throughout the beneficiary’s lifetime to improve the quality of his or her life. Accordingly, SNTs are an attractive option for disabled individuals who lack sufficient financial resources to pay for all of their own care needs but who have (or may have in the future, as in the case of an anticipated inheritance), some assets that could be used to pay for goods or services that cannot be obtained through public benefits.

The following rules must be observed to ensure that assets held in a SNT for a disabled individual will not count towards the individual’s Asset Limit:

  • If funded with the disabled individual’s assets, the SNT must be irrevocable.
  • Trust assets can be expended only for the benefit of the trust beneficiary.
  • Trust assets must be used only for things the beneficiary cannot obtain through public benefits.
  • Trust assets cannot be paid directly to the beneficiary.
  • The beneficiary must qualify as “disabled” under the Social Security Act.

There is more than one type of SNT, each of which is subject to some additional rules:

  • Self-Settled SNTs
  • Third-Party SNTs
  • Pooled SNTs

Self-Settled Special Needs Trusts

Self-Settled SNTs may be created by the disabled individual’s parent, grandparent, guardian or a court, but must be irrevocable and funded with assets owned by the disabled individual. The beneficiary cannot be older than age 65 at the time the trust is created, and the trust must be managed by a trustee who is someone other than the beneficiary.

It is important that the trustee not expend trust assets on goods or services that the beneficiary can obtain through his or her public benefits. This is because, under the rules governing the SSI and Medicaid programs, there is a substantial risk that the individual’s benefits will be discontinued if the trustee uses trust funds to pay for expenses covered by the public benefit.

The terms of the trust must provide that, upon the death of the beneficiary, the state Medicaid agency will be reimbursed from any remaining trust assets up to an amount equal to the total medical assistance paid on behalf of the disabled individual. For this reason, self-settled SNTs are often referred to as “payback trusts.”

Third-Party Special Needs Trusts

Third-party SNTs can be revocable or irrevocable and are funded with the assets of a third party (often the disabled individual’s parents or other family member) for the benefit of a disabled individual. The trust must become irrevocable upon the death of the person who supplied the assets to fund the trust (“Grantor”).

As with self-settled SNTs, the trustee of a third-party SNT must be someone other than the beneficiary, and 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. Unlike self-settled SNTs, however, third-party SNTs place no restrictions on the age of the beneficiary and there is no required Medicaid payback provision. Accordingly, when the disabled individual passes away, any funds remaining in the SNT can be paid out to beneficiaries chosen by the Grantor(s).

Pooled Special Needs Trusts

Self-settled and third-party SNTs are created and administered for the benefit of one specific disabled individual, and they are usually administered by a private trustee (often a family member of the disabled individual well-versed in the rules governing the public benefit received by the individual). Pooled trust programs allow for the assets of many disabled beneficiaries to be administered under a single umbrella program to enhance the investment potential of each individual’s assets and the efficiency of administering the trusts.

Federal law requires that pooled trusts be run by nonprofit associations, and these associations usually work closely with a bank, trust company or other financial institution to undertake the daily management of the many accounts participating in the program. A separate account is maintained for each individual participant in the pooled trust program, though all accounts are pooled for investment and management purposes.

Pooled trusts may be created by a parent, grandparent, guardian or court, and can also be created by the disabled individual him or herself. Upon the death of a disabled individual, the balance left in his or her account is either retained in the trust for the nonprofit association or paid back to the State Medicaid agency for Medicaid benefits paid to the decedent during his or her lifetime. Alternatively, if the pooled trust was funded with assets belonging to anyone other than the disabled individual, any balance remaining at the death of the disabled individual can be paid out to beneficiaries chosen by the Grantor(s).

At least two pooled trust programs are available in Wisconsin – WisPACT and Life Navigators. You can find more information about them on their websites:

Life Navigators : http://www.lifenavigators.org/

WisPACT : http://www.wispact.org/

The assistance of a qualified and experienced attorney is critical to the successful creation and funding of any SNT. If you or a loved one has a disability and you believe a SNT might be appropriate for your situation, contact an attorney at Moertl, Wilkins & Campbell, S.C. for more information!