Volume 20, Number 6
September 2003


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ESTATE AND FINANCIAL PLANNING

SPECIAL NEEDS TRUSTS

By Kristen Lewis Denzinger

Kristen Lewis Denzinger is counsel with the Atlanta, Georgia, law firm of Smith Gambrell & Russell, LLP.


One of the biggest concerns voiced by families of persons with disabilities is how best to fund their long-term personal and financial needs. The "special needs trust" (SNT) is a planning vehicle that can be established and customized to address the unique circumstances of each family faced with the task of securing the future of a disabled loved one. Careful drafting can allow the disabled beneficiary to become and remain eligible for need-based government benefits.

Federal and state laws permit SNT planning that maximizes the use of all available resources, both private and governmental, to provide fully for the needs of the disabled. For persons of limited means, government programs may constitute the primary source of funding for their current and future needs. Surprisingly, government assistance is often also available to families with more significant resources to help meet certain basic needs of their disabled relatives. These families can then use their personal resources to provide for nonbasic needs and quality-of-life enhancement. The disabled person first taps into any government benefits to which he or she is entitled, and then the family's private assets serve as a secondary source of support to supplement, not supplant, government benefits.

Typically, the SNT is set up as a fund that is privately and professionally managed and administered by a corporate trustee for the sole benefit of a person with disabilities or other impairments. There are two basic types: a General Support SNT and a Supplemental Care SNT. The majority of SNTs are Supplemental Care SNTs, which are designed to serve as a secondary source of benefits for the beneficiary after all available government benefits have been exhausted. The assets of a properly drafted Supplemental Care SNT are not considered "available resources" for purposes of qualifying the beneficiary for need-based benefits. By contrast, any property in a General Support SNT, which is designed to serve as the primary or sole source of benefits for the beneficiary, would be considered an available resource of the beneficiary, which can preclude eligibility for need-based benefits.

To determine which type of SNT is most appropriate, the primary consideration is whether the assets and resources belonging to, or otherwise available to, the beneficiary are likely to cover fully the cost of supporting and caring for the beneficiary during his or her lifetime. If such assets and resources are likely to be sufficient, then a General Support SNT may be appropriate. But if the beneficiary's assets and resources are inadequate, and need-based government programs could constitute a critical part of funding the beneficiary's needs, a Supplemental Care SNT may be in order.

"Special needs" encompasses not only medical and health-care services and products that may benefit a disabled beneficiary, but also a wide range of related services and quality-of-life options that may be tailored to the particular circumstances of the beneficiary. For example, once a beneficiary's medical needs are adequately provided for, the SNT may help fund the cost of additional service providers, such as domestic and personal assistants to aid the beneficiary. The SNT can purchase a customized, accessible van or other vehicle appropriate for the beneficiary's circumstances. Similarly, SNT assets can be used to pay for beneficial living arrangements, including additions or renovations to the beneficiary's residence to render it accessible, the cost of a communal or assisted-living arrangement, or a "luxury" skilled nursing facility. Permissible disbursements from an SNT are limited only by the creativity of the drafting attorney and the overriding requirement that the beneficiary derive the primary benefit.

Someone creating an SNT may do so during life or by will. A third party, such as a parent or other relative, may fund the SNT, or it may be funded with the assets of the beneficiary. If the SNT is "self-settled"—funded with the beneficiary's own assets-federal law requires that the SNT must provide for the reimbursement of government medical providers at the beneficiary's death from the property then remaining in the SNT, up to the full amount of medical benefits previously paid on behalf of the beneficiary. Only after this "payback" requirement is fulfilled may other persons—such as the descendants or siblings of the deceased beneficiary—share in any remaining trust property.

There are two additional requirements under federal law: the beneficiary must be "disabled" within the meaning of the Social Security Act, and the beneficiary must be under age 65 when the SNT is established and funded with the beneficiary's assets. For persons who are over age 65 when a self-settled Supplemental Care SNT is desired, federal law provides only one option: a "pooled" SNT in which numerous disabled persons of any age may participate.

By contrast, a "third-party" SNT—one that is funded with assets not belonging to the beneficiary—is not subject to the payback requirement. All property remaining in a third-party SNTs at the death of the beneficiary may be distributed to others as the trust agreement directs. Thus, it is essential that the assets of third-party SNT are not commingled with the assets of self-settled SNTs, which would unnecessarily subject the assets of the third-party SNTs to the payback requirement. A further advantage of third-party SNTs is that there is no age limitation or specific disability requirement, in contrast to self-settled SNTs, because third-party SNTs are not subject to the federal law that authorizes self-settled SNTs.

A word of caution: After a Supplemental Care SNT is established, all future trusts for the benefit of that beneficiary must also be drafted as Supplemental Care SNTs. A nonqualifying SNT for the beneficiary, or any outright transfer, will constitute an "available" asset or resource of the beneficiary for purposes of maintaining his or her eligibility for need-based benefits. This, in turn, has the effect of rendering even a properly drafted Supplemental Care SNT ineffective for the beneficiary. Therefore, it is imperative to coordinate planning efforts with others who may wish to benefit the beneficiary of a pre-existing Supplemental Care SNT. It is helpful to use a "standby" Supplemental Care SNT to serve as a common receptacle for gifts, bequests, and other transfers from third parties for the beneficiary's benefit. Donors may simply "incorporate by reference" the provisions of the preexisting standby SNT and need not arrange to include a full set of SNT provisions in their own wills or other instruments of transfer.

Because the administration of an SNT is highly labor intensive, a professional trustee, such as a bank or trust company, can best perform the fiduciary tasks. Although it may appear that family members of the beneficiary would be sensible candidates, the law in some jurisdictions specifically precludes them from serving in that capacity. In many cases, such persons are often the presumptive remainder beneficiaries of the SNT, and thus they may be tempted to "skimp" on disbursements for the beneficiary to help ensure that a larger fund is available for remainder distribution. Using a corporate trustee avoids this concern and also ensures that the management of the SNT will not be interrupted by the incapacity or death of individuals who might otherwise serve as trustees.


FOR MORE INFORMATION ABOUT THE REAL PROPERTY, PROBATE AND TRUST LAW SECTION
- This article is an abridged and edited version of one that originally appeared on page 11 of Probate & Property, May/June 2003 (17:3).
- For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.
- Website: www.abanet.org/rppt/.
- Periodicals: Probate & Property, bimonthly magazine; Real Property, Probate and Trust Journal, quarterly journal.
- Books and Other Recent Publications: Probate and Trust: Third Party and Self-Created Trusts, 3d ed. and Client Brochures; Asset Protection Strategies; An Estate Planner's Guide to Qualified Retirement Plan Benefits, 3d ed.; An Estate Planner's Guide to Buy-Sell Agreements for the Closely Held Business; A Guide to International Estate Planning; Bridging the Gap: Drafting for Tax and Administration Issues; An Estate Planner's Guide to Life Insurance, 2d ed.; S Corporations and Life Insurance, 2d ed.; The Irrevocable Life Insurance Trust, 2d ed. Real Property: Synthetic Lease Financing; A Practical Guide to Commercial Real Estate Transactions; Anatomy of a Mortgage; Title Insurance, 2d ed.; The Commercial Property Lease, vol. 3; Accessibility under the Americans with Disabilities Act and Other Laws; Land Surveys, 2d ed.; A State-by-State Guide to Construction and Design Law.


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