May 01, 2003

Special Needs Trusts (2003, 17:03)

Special Needs Trusts

Probate and Property, May/June 2003, Volume 17, Number 3

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

Many of us have relatives, friends, or colleagues who are challenged on a daily basis by some type of incapacitating physical, mental, or developmental disability. In days past, the families of disabled persons often kept their personal circumstances a secret; the disability of a loved one was a taboo subject that was not to be discussed openly. To make matters worse, very few competent professional advisors were available to help plan for the “special needs” of disabled persons. Left on their own, many disheartened families had limited options to ensure appropriate care for disabled relatives after their primary caregivers died or grew too old and infirm to provide the necessary care.

New Hope for the Disabled

Much has changed in the emerging area of planning for the disabled. Law schools now routinely offer courses that address the numerous specialized needs of people who are disabled. As a consequence, the number of lawyers focusing on elder law, disability planning, and government benefits planning has increased dramatically. These specialized lawyers are able to render legal advice that more fully meets the needs of the disabled community. Joining forces with these lawyers is an array of allied professionals, such as life-care planners, rehabilitation specialists, disability-specific support groups, and legislative advocates for the disabled. Together, they provide ready access to valuable resources for persons of all ages who are challenged by incapacitating disabilities.

Public-Private Funding of Special Needs

One of the biggest concerns voiced by families of persons with disabilities is how best to fund their long-term personal and financial needs in a manner that will secure for them a full—and fulfilling—lifestyle geared to their specific abilities and preferences. Increasingly, lawyers are recommending a flexible and effective option to provide for the immediate and future benefit of disabled persons: the “Special Needs Trust” (SNT). This planning vehicle can be established and customized to address the unique circumstances of each family faced with the daunting task of securing the future of a disabled loved one. Careful drafting of the SNT can allow the disabled beneficiary to become and remain eligible for need-based government benefits, such as Medicaid and Supplemental Security Income, which often serve as significant sources of funding for the disabled beneficiary’s special needs.

Contrary to popular belief, such government benefits are not just for the poor. Federal and state laws permit, and even encourage, 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 enhancements. Thus, 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—such government benefits. Families from all economic backgrounds hail this public-private partnership as an effective means of funding the special needs of disabled persons. The cornerstone of this partnership is the SNT.

Which Special NeedsTrust Is Best?

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 (the beneficiary). There are two basic types of SNTs: a General Support SNT and a Supplemental Care SNT. The vast 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 for a disabled beneficiary, 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 to fund fully all of the special needs of the beneficiary (as is more often the case), and need-based government programs could constitute a critical part of funding the beneficiary’s needs, then a Supplemental Care SNT may be in order. Most families who undertake SNT planning desire to maximize all available resources, including government programs. For that reason, the Supplemental Care SNT is by far the more frequent choice.

Flexible andComprehensive Care

“Special needs” is a broad term encompassing not only medical and health-care services and products that may benefit a disabled beneficiary, but also a wide range of relatedservices 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 with the “activities of daily living,” or attendant and respite care to give the beneficiary’s primary caregiver a much needed break. The SNT can purchase a customized, accessible van or other vehicle appropriate for the beneficiary’s circumstances and pay the cost of the maintenance, insurance, and periodic replacement of the vehicle. 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.

Other common SNT disbursements include funds for

•     Appropriate recreational and vocational activities;

•     Hobbies and vacations;

•     Educational and training opportunities;

•     Augmentative communication equipment;

•     Professional services for the beneficiary, including attorneys, accountants, and claims processors; and

•     Procurement and maintenance of a pet or service animal for the beneficiary.

Permissible disbursements from a SNT are limited only by the creativity of the drafting attorney and the overriding requirement that the beneficiary derive the primary benefit.

Establishing and Funding a Special Needs Trust

Someone creating a 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 Medicaid (or other government medical providers) at the death of the beneficiary from the property then remaining in the SNT (if any), 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 for a qualifying, self-settled Supplemental Care SNT:

•     The beneficiary must be “disabled” within the meaning of the Social Security Act, that is, unable to engage in any substantial gainful activity as a result of his or her disability; and

•     The beneficiary must be under age 65 when the SNT is established and funded (or subsequently augmented) with the assets of the beneficiary.

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. For example, in Georgia, The Georgia Community Trust operates a pooled SNT for disabled persons who reside within the state.

By contrast, a “third-party” SNT—one that is funded with assets not belonging to the beneficiary—is not subject to the payback requirement described above. All property remaining in a third-party SNT 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 SNTs 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.

Coordination Is Key

A word of caution: After a Supplemental Care SNT is established for a beneficiary, 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 (such as a gift, bequest, or intestate share to which the beneficiary becomes entitled), 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. To facilitate the necessary coordination with the least amount of inconvenience and expense to those others who wish to provide for the beneficiary, it is helpful to use a “stand-by” Supplemental Care SNT. The stand-by SNT can 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 pre-existing stand-by SNT and need not arrange to include a full set of SNT provisions in their own wills or other instruments of transfer.

Trustee Considerations

Because the administration of a 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 the parents, guardians, or other family members of the beneficiary would be sensible candidates to assume the office of trustee of the SNT, the law in some jurisdictions specifically precludes such persons from serving in that capacity. In many cases, such persons are often the presumptive remainder beneficiaries of the SNT after the death of the beneficiary; thus, they might be tempted to “skimp” on disbursements for the beneficiary to help ensure that a larger fund is available after the death of the beneficiary for distribution to the remaindermen. 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. Selecting an appropriate trustee is critical to the effectiveness of the SNT, and many variables must be evaluated and considered in this regard, including the prior experience of the proposed trustee with administering SNTs and the relevant fee schedule that would apply to the SNT.

Most corporate fiduciaries charge an annual fee of at least 1% of the value of the trust principal under management. This comprehensive fee covers numerous services, including investment advice, tax reporting, and fiduciary bookkeeping. If the SNT principal is relatively modest, how-ever, it may not be cost-effective to use a corporate trustee in the context of a privately administered SNT. In that case, a pooled SNT, such as the one operated by The Georgia Community Trust, may be a more cost-effective option, albeit one with fewer investment alternatives and other collateral services.

Identifying Qualified Legal Specialists

Even though public demand for SNT planning is clearly on the rise, and increasing numbers of lawyers are choosing to practice in this area, many estate planning attorneys remain unfamiliar with the concept and operation of SNTs. As a result, general practitioners often choose to associate as “co-counsel” with an attorney who is proficient in SNT planning when such specialized expertise is needed. State and local bar associations may serve as a good starting point for identifying attorneys who have particular expertise in SNT planning. Professional organizations, such as the National Academy of Elder Law Attorneys, may also be of assistance in identifying local attorneys who specialize in this emerging area of law.

The Future Is Bright

Persons with disabilities, and their concerned families, no longer need to contemplate a grim future with limited options. There is at long last a heightened public awareness of the many planning options available to secure the future of persons with disabilities. This, coupled with the swelling ranks of professional advisors able to render competent advice in this emerging area of law, bodes well for the disabled population and those who endeavor tirelessly to provide the best care for them.