The Special Needs Trust for Long-Term Care Planning

Vol. 1 Issue 12

By

Donna J. Jackson, CPA, JD, LLM, is the principal at Donna J. Jackson & Associates in Oklahoma City. Her practice focuses on estate planning and tax law, and she has a deep experience with estate planning, including trusts, wills, and business succession planning. 

A parent or grandparent of a child who has a disability will want to do everything in their power to protect their child, including protecting their financial future. One powerful tool for doing this is a Special Needs Trust, often referred to as a Supplemental Needs Trust.

These trusts are designed for beneficiaries who have a physical or mental challenge, and can be used to help adults as well. There are three types: Pooled Trusts; Self-Settled Trusts; and Third Party Trusts.

Pooled Trusts

A trust containing the assets of a disabled individual when all of the following are met:

  1. The trust is established and managed by a non-profit association;
  2. The trust must be made irrevocable;
  3. The trust must be approved by the specific state Department of Human Services and may not be amended without that department’s permission;
  4. The disabled person has no ability to control the spending in the trust;
  5. A separate account is maintained for each beneficiary of the trust, but for the purposes of investment and management of funds, the trust pools these accounts;
  6. The separate account on behalf of the disabled person may not be liquidated without payment to the specific state’s Department of Human Services for the medical expenses incurred by the members
  7. Accounts in the trust are established by the parent, grandparent, legal guardian of the individual, the individual, or by a court;
  8. To the extent that amounts remaining in the beneficiary's account on the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts an amount equal to the total medical assistance paid on behalf of the individual. Each state has a limit on the amount of corpus the Pooled Trust may retain for the non-profit association.

The advantages of using a Pooled Trust is the person with a disability under 65 years of age may create his or her own pooled trust subaccount. Because the pooled trust is managed by a non-profit organization, it is not necessary to find a trustee who is willing to manage the trust. Additionally, because the trust funds are pooled for investment and management purposes, the administrative expenses of these trusts are frequently lower than those of a d(4)(A) SNT.

Self-Settled Trusts

The use of a Self-Settled Trust protects the disabled person from losing his or her government benefits for Medicaid and SSI. If a disabled person retains assets, inheritances or personal injury settlements in their own name, they could lose their government benefits. 42 U.S.C. § 1396p(d)(4)(A) allows people who meet the SSA definition of ‘disabled’ to have a trust and retain Medicaid eligibility. The trust must solely benefit a disabled person who is under 65 years old when the trust is established and funded; be established by the beneficiary’s parent, grandparent, guardian, or a court; contain only the beneficiary’s money; be irrevocable; and provide that upon the beneficiary’s death, the Medicaid program is paid back for funds expended after establishment of the trust.

If a trust meets these requirements, the income and undistributed corpus are not considered available to the beneficiary for purposes of determining Medicaid eligibility. The SSI statute on trusts was amended on January 1, 2000, to treat a trust as exempt if it conforms to the requirements in 42 U.S.C. § 1396p(d)(4)(A).

Examples of permissible trust distributions from a trust established for the benefit of an SSI recipient are:

  • Home purchases with rent paid by occupant;
  • Home improvements, repairs, and maintenance by outside source;
  • Tools to perform home improvements, repairs, and maintenance by homeowner;
  • Installation of burglar alarm or monitoring/response system in home;
  • School tuition, books and supplies;
  • Health and life insurance premiums;
  • Entertainment purposes, including books and magazines; trips to movies, plays, museums, and sporting events; audio and video equipment; or hobby supplies;
  • Purchase and maintenance of car or bus passes;
  • Household goods and other items of personal property of reasonable value;
  • Clothing;
  • Payment for items such as cleaning supplies and paper products;
  • Telephone expenses;
  • Dental care, physical therapy, massages, support services, and other medical costs not covered by any benefit programs;
  • Home care services not covered by another program;
  • Durable medical equipment, such as wheelchairs; or
  • Gifts of limited amounts to family members (under certain circumstances).

Third-Party Supplemental Needs Trusts

A third-party SNT is a trust that is set up and funded by the assets of someone other than the beneficiary. The Trust can specify who the contingent beneficiaries are who will receive the remaining trust assets upon the death of the primary beneficiary. Commonly, a family member will create such a third-party SNT leaving property in the third-party SNT through their estate planning (e.g., their will, trust, life insurance, or other beneficiary designation). These assets will then go toward supporting the individual with special needs.

Advantages: The advantage of a third-party special needs trust is to preserve public benefits for the trust beneficiary while supplementing the beneficiary's lifestyle. Planning by parents and grandparents can provide the following for the person with disabilities:

  • Protect public benefits
  • Money management
  • Control of distributions
  • Avoid cost-of-care reimbursement claims
  • Avoid share-of-care claims
  • Provide for the child with a disability, if public benefits are curtailed or eliminated in the future;
  • Provide for benefits and services that supplement public benefits;
  • Provide additional financial support beyond public benefits;
  • Select an appropriate individual or entity to manage the inheritance;
  • Provide guidelines for asset management;
  • Provide guidelines for living arrangements and personal care;
  • Provide guidelines for advocacy for the person with the disability;
  • Facilitate employment and social activities;
  • Coordinate an entire family’s planning;
  • Preserve assets for other heirs at the death of the person with disability.

If parents and grandparents do not plan the person with disability may lose eligibility for needs-based public benefits; require self-settled planning, which is more complex and more expensive and takes longer than third party planning; forego the benefit of a directed lifetime care plan for the person with disabilities; fall subject to undue influence or waste or use assets in ways the client would like to prevent; overwhelm family relations; and face being in an institution or inappropriate placement.

Every parent or grandparent of a disabled child should consider special needs trust planning, whether the anticipated inheritance is large or small. By providing for the child's extra or supplemental needs, while retaining government benefits, the child's life can actually be enhanced by the inheritance.

This is more beneficial than the traditional approach of simply disinheriting the disabled child. When the client says "but his brother will look after him," it is the lawyer's job to gently suggest that the disabled child's brother may: want to live his own life; resent such a burden being placed upon him; marry someone who feels the same; have a future of uncertain financial stability; or fail to outlive the disabled sibling, leaving nieces, nephews and in-laws responsible for "looking after" their disabled relative.

Update

The rules for Special Needs Trusts recently got better: On December 13, President Barack Obama signed into law H.R. 34, which included the Special Needs Trust Fairness Act - something we have eagerly been awaiting. No longer will individuals with disabilities - but who have capacity - need a parent, grandparent, guardian or court to establish a (d)(4)(A) Trust. Now these individuals will be able to save valuable time and money by establishing their own (d)(4)(A) special needs trusts.

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