October 2004
Volume 1, Number 1
Table of Contents

Your Client May Need A Special Needs Trust: Tips For Creating A Special Needs Trust For Disabled Clients
By Robert W. Fechtman

Working with disabled clients and their families is the most gratifying part of my law practice. One of the most important aspects of working with disabled clients – particularly, younger, disabled clients – is helping them preserve funds for the long-term improvement of their quality of life. This work is extremely rewarding because it provides great comfort to the disabled and their families who can rest assured that these individuals will be taken care of for their entire life. It is an added bonus that my work generally satisfies the fiduciary obligations of banks, guardians and personal injury attorneys to receive and protect funds without jeopardizing eligibility for public benefits.

A special needs trust is essentially an investment vehicle that holds funds for the benefit of a disabled individual, and allows for the use of those funds to provide items and services for that individual to improve their quality of life, without jeopardizing eligibility for public benefits, such as Medicaid and Supplemental Security Income (“SSI”). The trustee of the special needs trust may use the trust funds for a variety of purposes. For example, the trustee may pay for hours of home health care in addition to those paid for by Medicaid, or the trustee may buy a computer for education and entertainment purposes, or the trustee may send the trust beneficiary and a caregiver, if necessary, on a vacation.

There are basically two different types of special needs trusts. There are special needs trusts that hold assets that belonged to the disabled individual, and those trusts must reimburse the State for its Medicaid costs at the death of the disabled individual. And, there are special needs trusts that hold assets that came directly to the trust from someone other than the disabled individual (a parent or grandparent, perhaps), and those trusts need not reimburse the State for its Medicaid costs at the death of the disabled individual.

The Omnibus Budget Reconciliation Act of 1993 (specifically, 42 U.S.C. 1396p(d)) authorizes the use of trusts created with the funds of recipients of public benefits, if certain conditions are met:

1. The recipient of public benefits must be less than sixty-five (65) years old at the time the trust is established.

2. The special needs trust must be established by a parent, grandparent or guardian of the recipient of public benefits, or by a court. However, if the trust is a pooled special needs trust, the trust may also be established by the recipient of public benefits, him- or herself.

3. The special needs trust must be irrevocable.

4. The trustee of the special needs trust must have sole and absolute discretion over the use of the trust funds for the sole benefit of the recipient of public benefits. This means that the trust must be worded so that the trustee is not required to make any payments of income or trust principal directly to the recipient of public benefits.

5. The trust must include a provision that states that any funds remaining in the trust at the death of the trust beneficiary (the recipient of public benefits) are available to reimburse the State for its Medicaid costs on behalf of that trust beneficiary since the time that the trust was established. Although, in the case of a pooled special needs trust, the trust is allowed to retain a portion of any remaining funds for the benefit of other beneficiaries of the pooled trust.

A special needs trust that holds assets that came directly to the trust from someone other than the disabled individual may be much more flexible. It may be revocable by the settlor, it may be established even after the disabled individual turns age sixty-five (65), and it need not include language reimbursing the State at the death of the disabled trust beneficiary. So, the parent of a child with special needs can use a special needs trust to make sure that their child is taken care of after they are gone, and the parent can ensure that any of the trust funds that are not used for the benefit of that child go to other members of the family when that child passes away. This is the best of both worlds. Medicaid and SSI can assist the disabled individual, the special needs trust can supply supplemental items and services to improve the quality of life of that individual, and the trust funds remaining at the death of the disabled individual can come back to the family, without Medicaid or the Social Security Administration having a claim to any of these funds.

If you have not made special needs trusts a part of your law practice, I heartily recommend that you consider adding these trusts to your arsenal of planning tools. However, on a cautionary note, it would not be prudent to dabble in special needs trust drafting. Some states have statutes that implement OBRA ’93 in different, and sometimes restrictive, ways. Also, administration of special needs trusts has quite a few pitfalls for the unwary, and even the best special needs trust can cause ineligibility for public benefits if it is improperly administered. Consider learning from a very experienced colleague, or plan to attend one of the Stetson University College of Law’s excellent special needs trust seminars (find out more about these seminars at www.law.stetson.edu ).

Robert W. Fechtman is certified as an elder law attorney by the National Elder Law Foundation, and he is in private practice in Indianapolis, Indiana. Mr. Fechtman is a member of the Special Needs Alliance, which is a national group of disability lawyers focused on special needs trust planning.

 

Back to Top

< /