A Primer on Supplemental Needs Trusts

Vol. 3, No. 7

Denise R. Kaplan is with Rivkin & Rivkin, LLC.

 

Special situations often call for special types of trusts. In the case of individuals with special needs, a supplemental needs trust (also often referred to as a special needs trust or SNT) can be a useful and important planning tool.

If a person with a disability does not have the ability to be fully self-supporting once they have reached the age of majority, the individual may want to apply for government benefits to help sustain their support and medical needs. If the person does not meet the requirements for Social Security Disability Income or Medicare, two programs which are not means-tested, due to their age or lack of a work record (and, in some cases, even if they do), they might wish to apply for Supplemental Security Income (SSI) and Medicaid, two of the largest means-tested public benefits currently available. SSI is a monthly benefit that is intended to cover a person’s shelter and food expenses, and Medicaid is the program that covers an individual’s health care and prescription drug costs, including the costs of living in a skilled nursing facility, as well as some day programs.

In order to qualify for SSI and Medicaid, individuals must prove that they have little assets and income and a disability that is expected to last 12 months or more, resulting in the person’s inability to engage in “substantial gainful activity” (the government’s definition of enough work to be self-supporting, currently $1,070 per month for nonblind individuals). With some minor exceptions, if a person has assets of more than $2,000 or income in excess of certain limits, he will be ineligible for public benefits. Therefore, in many cases where a disabled person will receive an inheritance or settlement award, or has even modest assets on hand, he will be rendered ineligible to receive, or to continue receiving, SSI and Medicaid. That is where SNTs step in, opening the door for an individual to qualify for public benefits.

A trust is a legal document where the person who creates the document (known as the grantor or settlor) transfers property to a trustee (which can be an individual or bank, and sometimes the grantor himself), to manage for the benefit of one or more beneficiaries. Trusts are generally useful for allowing assets to be managed for those who do not have the ability to do so themselves, and they can protect assets from creditors and those who might otherwise take advantage of a person with diminished capacity.

Typical trusts, such as those created by parents for their children at death, allow distributions for the child’s health, support, and education. In contrast, an SNT should not allow the trustee to make distributions for the beneficiary’s health and support, or the government will count the trust as an available asset to the beneficiary for public benefits purposes. Instead, an SNT should allow the trustee to make distributions for the beneficiary in the trustee’s sole discretion, making distributions only for items or purposes that supplement, and generally not supplant, public benefits. Trust assets can be used to acquire items or services that enrich the quality of the beneficiary’s life and provide extra or better housing or medical treatment than public benefits cover. For example, if a beneficiary’s SSI and Medicaid would allow the person only to have a shared room in a skilled nursing facility, the trust can provide the extra funding for a private room.

There are three types of SNTs:

  1. Third-party funded trusts—to be created and funded by parents, grandparents, siblings, or friends;
  2. First-party funded trusts (also known as a d-4-A or payback trusts)—to be funded with a disabled person’s own assets, but created only by the person’s parent, grandparent, legal guardian, or court; and
  3. Pooled trusts (known as d-4-C trusts)—which are beyond the scope of this article.

The first two types of trusts are similar in concept, but a payback trust must be created for the sole benefit of one beneficiary, and, with limited exceptions, must provide that Medicaid will be paid back upon the beneficiary’s death for all medical assistance provided to the beneficiary during her lifetime.

The trust document should specify the grantor’s intent in providing for the beneficiary’s supplemental needs, specify how any remaining assets pass upon the beneficiary’s death (after any Medicaid reimbursement in the case of a payback trust), and set forth a succession of trustees to manage the trust. An SNT should be drafted by an attorney with experience in supplemental needs planning, as a poorly drafted trust can be denied by the Social Security Administration and create a lengthy, expensive, and unnecessary appeals situation for a client whose life is already difficult. Even standard trust provisions (such as boilerplate trust termination clauses) must be reviewed and sometimes altered or eliminated in an SNT. As with any trust, the trust should include as much flexibility as possible to allow for changing circumstances, such as a beneficiary’s relocation to another state, an exhausted trustee succession, and changes in supplemental needs trust law.

Because there is a state component to public benefits, each state generally has its own requirements for the creation and funding of a supplemental needs trust. It is important that an SNT be drafted in accordance with the law of the state where the beneficiary lives and will be receiving public benefits.

Attorneys handling estate plans or personal injury cases have many opportunities (and, arguably, an obligation) to educate their clients about special needs planning and assist them in considering whether supplemental needs planning is appropriate. During the estate planning process, the attorney should ask whether any of the client’s intended beneficiaries are receiving, or might one day need to apply for, public benefits. Even a client leaving significant assets to a beneficiary with a disability may wish to create an SNT, because allowing the beneficiary to remain eligible for Medicaid can make programs available to the beneficiary that are simply not offered or easy to duplicate privately. Personal injury attorneys can advise clients who (or whose children) will likely need to rely on public benefits that a forthcoming settlement award should be directed to a payback trust during the settlement approval process.

If you ever encounter a situation where a client, or someone involved with the case at hand, is receiving or might eventually need means-tested government benefits, consider whether SNT planning would be advantageous.

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