SPECIAL NEEDS AND DISABILITY

Special needs trusts offer significant benefits in assisting people with special needs and those who’ve been disabled. The primary goal of special needs and disability planning typically is two-fold: preserve eligibility for government benefits, especially Medicaid, while setting aside resources that can be used to meet additional needs not covered by government assistance.

Parents of children who suffer from disabilities often establish trusts for their offspring to ensure their continued care after the parents’ death. Trusts also are established for individuals using their own assets, such as those from a personal injury settlement or inheritance. Within the context of a divorce, a trust can be established to protect a property settlement or share of marital assets. Special needs trusts may be established by parents, grandparents, legal guardians or courts. Once transferred, the assets in such trusts are no longer counted in determining eligibility for Supplemental Security Income (SSI) or Medicaid benefits. However, certain distributions from the trusts can affect government benefits. Consequently, those administering special needs trusts should rely on guidance from qualified attorneys.

Special needs trusts generally involve two types of trusts with legal distinctions: self-settled trusts and third-party trusts. Self-settled trusts are established for the beneficiary by someone acting on his or her behalf using the beneficiary’s assets. The most common sources of assets for self-settled trusts include inheritances and proceeds from legal settlements or lawsuits. Third-party trusts are established by someone other than the beneficiary with assets that never belonged to the beneficiary, typically funds from parents or other family members. The key difference is whether or not the beneficiary had the right to possess the assets before the trust was established.

Self-settled trusts are different from third-party trusts in another important way. Self-settled trusts established for beneficiaries receiving Medicaid benefits must include a payback provision. Following the death of the beneficiary, the trustee must use remaining trust assets to reimburse the state for those benefits. Self-settled special needs trusts are sometimes called (d)(4)(a) trusts after the section of federal code authorizing the trusts. Third-party trusts don’t require a payback provision.

Under certain circumstances, a third type of special needs trust called a sole benefit trust could be appropriate. Medicaid regulations allow benefit applicants to make unlimited gifts “for the sole benefit” of disabled spouses or children. In this situation, an individual could establish a trust for a spouse, child or grandchild in the hopes of securing Medicaid eligibility for himself while setting aside assets for a beneficiary without affecting their government benefits.

It’s important not only to carefully draft a special needs trust to accommodate the unique needs of the beneficiary, but also carefully administer the trust. Otherwise, there’s the potential to interfere with the very benefits the trust was created to leave intact.

Special needs trusts generally are established to meet needs not covered by government benefits — a handicapped-accessible van or motorized wheelchair, for example, or telephone or cable television service. Trust distributions also may be used for special medical therapies or treatments, training and books, travel and entertainment and prepaid funeral arrangements. At the same time, distributions for other uses are not allowed without affecting benefits, including housing, food and cash distributions above $20 a month.

In certain circumstances, however, the benefits of using trust distributions outweigh the disadvantages of losing government benefits. For example, a trustee might decide to pay a beneficiary’s rent of $1,000 a month because the corresponding one-third reduction in SSI benefits constitutes only a fraction of that amount.