About Special Needs Trusts

A Special Needs Trust (sometimes called a Supplemental Needs Trust) is a specialized legal document designed to benefit an individual who has a disability. A Special Needs Trust is most often a “stand alone” document, but it can form part of a Last Will and Testament. Special Needs Trusts were first recognized by the United States Congress in 1993 in the Omnibus Budget and Reconciliation Act of 1993.

A Special Needs Trust enables a person under a physical or mental disability, or an individual with a chronic or acquired illness, to have, held in Trust for his or her benefit, an unlimited amount of assets.  With a Special Needs Trust, those assets are not considered countable assets for purposes of qualification for certain governmental benefits.

Governmental benefits may include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing, and other benefits based upon need. For purposes of a Supplemental Needs Trust, an individual is considered impoverished if his or her personal assets are less than $2,500.00. A Special Needs Trust provides for supplemental and extra care over and above that which the government provides.

In 1993, Congress specifically authorized the use of Supplemental Needs Trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. The Social Security Operations Manual authorizes the use of Special/Supplemental Needs Trusts to hold non-countable assets. According to Congress a Supplemental Needs Trust must be irrevocable. A properly-drafted Trust will include provisions for Trust termination or dissolution under certain circumstances, and will include explicit directions for amendment when necessary.

On December 13, 2016, Congress passed the “Special Needs Trust Fairness Act.” Federal law also authorizes a mentally and legally competent SNT beneficiary to establish an individual first-party Special Needs Trust. A first-party Special Needs Trust is funded with property that belongs to the beneficiary, or to which the beneficiary is or becomes legally entitled. Property in a first-party Special Needs Trust can only be used for the “sole benefit” of that beneficiary. Individual first-party Special Needs Trusts may be created (and funded) only for individuals who meet the government’s definition of “disabled” and are under sixty-five years of age when the Special Needs Trust is established (and funded). Under prior law only a parent, grandparent or a court could establish a, a sibling

Each Special Needs Trust is its own “entity” with its own Federal Identification Number (Employer Identification Number) issued by the Internal Revenue Service. The Trust is not registered under either the Grantor’s or the Beneficiary’s Social Security Numbers.

There are two types of Special Needs Trusts: as first-party and third-party SNTs. If the property funding the Special Needs Trust comes from the beneficiary, then it is a first-party SNT. On the other hand, if the property funding the Special Needs Trust comes from someone other than the beneficiary, it is a third-party Special Needs Trust.

First-party Special Needs Trusts are funded directly by the beneficiary.  This usually happens when the beneficiary inherits money or property, or receives a verdict or settlement from personal injury litigation. These Special Needs Trusts are also used when a person has assets and becomes disabled in later life and needs to receive public benefits that have an income or asset limitation. This type of Special Needs Trust was created by the Omnibus Budget and Reconciliation Act of 1993 (OBRA-93). This type of Trust must be irrevocable and requires that Medicaid be paid back for expenditures made on behalf of the beneficiary upon his or her death. First-party Special Needs Trusts also called self-settled Special Needs Trusts, Medicaid payback trusts, or d4A trusts.

Third-party Special Needs Trusts are funded by someone other than the beneficiary. Often, the parents, grandparent, siblings, or any other person concerned about the welfare of the beneficiary, with disabilities or special needs will establish a third-party Special Needs Trust.  Third-party Special Needs Trusts can be included in a Will, a “Living Trust” (inter vivos trust) or as a stand-alone Special Needs Trust. These Special Needs Trust are usually funded upon the death of the beneficiary’s parents or the other individual(s) who established the Trust.

A Third-party Special Needs Trust does not have to be irrevocable in order to preserve the eligibility of the beneficiary for means-tested public benefits. The most important difference between third-party Special Needs Trust s and first-party SNTs (described below) is what happens to Trust property when the beneficiary dies. When the beneficiary of a third-party Special Needs Trust dies the Trustee is not required to use the remaining assets to reimburse Medicaid for benefits received by the beneficiary during his or her lifetime.

Virtually any kind of asset can be used to fund a Special Needs Trust, including insurance proceeds, inheritances, lump-sum payments from Social Security Disability or Supplemental Security Income, Settlements in legal matters, or just “piggy bank” money.

Many people neglect to set up a Trust when they receive assets, particularly lump sums of governmental benefits. However, it is important to realize that monies received as “back pay” for SSI or SSDI claims become income to the beneficiary when received. Ironically, this sudden influx of income can disqualify a person from the benefits they were just approved for.

For SSI, the rule is straightforward: A recipient cannot have more than $2,500.00 in assets. SSDI employment, income, and asset limits are more complex and confusing, and need to be anticipated.

In order to maintain benefits qualification, a Trust is a necessity as a “safe harbor” for any assets belonging to the disabled beneficiary.

Funds in a special needs trust can make a big difference in quality of life by paying for

Distributions for Non-Countable Resources. Therefore, the trust can make reasonable distributions for these non-countable resources. These include:

• Purchase a home, with rent paid by occupants (a Court may order that a primary care giver need not pay rent);
• Home improvements, repairs, and maintenance by outside source for home owned by trust;
• Weatherization assistance, such as insulation, storm doors and windows;
• Tools to perform home improvements, repairs and maintenance by homeowner;
• Furniture;
• Household goods of reasonable value;
• Handicap van or regular car;
• Durable medical equipment, such as wheelchairs;
• Medical treatment for which public funds are unavailable;
• Medical insurance;
• Health and Life insurance premiums;
• Difference between a private and semi-private room in an institution;
• Dental care, physical therapy, massages, support services, and other medical costs not covered by any benefit programs;
• Home care services for beneficiary not covered by another program;
• Personal services, including lawn mowing, house cleaning, grocery shopping and babysitting;
• Installation of a burglar alarm or monitoring/response system in home;
• School tuition, books and supplies for beneficiary (but not Room & Board);
• Television, radio and cable service;
• Audio/video equipment;
• Recreational equipment, games and crafts;
• Musical instruments;
• Clothing.
• Travel and education;
• Recreation and entertainment;
• Telephone bills for beneficiary;
• Newspaper subscriptions for beneficiary;
• Services of a care manager;
• Movies;
• Tax payments;
• Cleaning supplies and paper products;
• Vacations for beneficiary and one companion;
• Airline and other transportation tickets—used for travel by a beneficiary or spouse or parent whose income is subject to deeming, is not countable income to the beneficiary if used for travel among the 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, America Samoa and Northern Mariana Islands. The ticket is not considered income unless it is converted to cash; and
• Non-domestic travel—a ticket for non-domestic travel must be non-refundable.

Prepaid Funeral. Purchase a prepaid funeral for the Beneficiary out of Trust assets. If the Beneficiary dies without paying for a prepaid funeral, the Trust assets must first be used to satisfy any claims of Medicaid before a funeral can be purchased. It is important to purchase the funeral during the Beneficiary’s lifetime.

Distributions that will reduce the SSI Benefit. The trust cannot make distributions that will reduce the SSI Benefit. These include:

• Shelter-related expenses (mortgage payments, real property taxes, heating and cooling bills, electricity, garbage collection) (if the beneficiary lives in a home not purchased through the trust);
• Rent (if the beneficiary lives in a home not purchased through the trust);
• Groceries or meals (if not for the beneficiary);
• Cash for any purpose (in excess of $20 per month); and
• Education-related expenses for housing or food, such as dorm fees.

Other types of Spendthrift or Family Trusts aren’t appropriate for people with Special Needs because they don’t address the specific needs of the disabled beneficiary or his or her future lifestyle. Even in situations where a family may have significant resources to help a disabled family member a Special Needs Trust should be established to address these issues.

Property or money placed in the Special Needs Trust remain non-countable assets and allow the beneficiary to qualify for available benefits and programs. Just as importantly, Trust funds are not subject to creditors or seizure. Therefore, if the disabled beneficiary should ever be sued the beneficiary is not a “deep pocket” because monies placed in the Trust protected.