When Responsibility Can't End: Using a Special Needs Trust to Protect Your Loved One

Suppose for a moment that your best friends are the parents of two adult children, one with a disability and one without. The parents are traveling home from a movie one night when they become involved in an automobile accident with no survivors. They have left life insurance, retirement plan assets, and simple wills prepared a long time ago that name each other as the primary beneficiary and their children as the contingent beneficiaries. Each of the children is now the beneficiary of about $300,000 of assets. The oldest child, Ben ¿ who does not have a disability uses his inheritance to improve his home and buy a new car, saving some for future needs. But how might this play out for the younger child, Sean, who has multiple disabilities?

The Disabled Child

Sean may stand to lose more than he gains. He has relied on government benefits for his housing and extensive medical needs since he became eligible for federal (SSI) and state (Medicaid) benefits at age 18. His routine medical costs covered by Medicaid include expensive medicines, physical therapy, and doctor's visits. Sean's parents provided several thousand dollars per month of supplemental items for him, such as over the counter medicines, dental and eye care, special medical treatment, evaluations, and the difference between a private and semi private room at his residence. Because his inheritance was not carefully planned, it will be considered a "countable" resource for governmental purposes, unless Ben consults with a lawyer knowledgeable about a particular form of special needs trust. Without advice, Sean may lose his SSI and Medicaid until the inheritance is spent down to $2,000 of countable resources. If his housing is contingent on his Medicaid or SSI eligibility, he may also lose that.

Traditional Approach Without Special Needs Trust

Under a traditional approach, without special needs planning, Ben would file a petition in court to be appointed as Sean's guardian (of his person) and conservator (of his property, the inheritance proceeds) because Sean is not competent to make decisions for himself. After bonding, court, and conservator fees reduce Sean's inheritance up to 20 percent, the remaining funds could easily be spent within 5 years, since Sean would have to "private pay" for all medical costs and housing. During this period, Ben would renew the bond annually and account to the court for each expenditure. Once Sean's assets are substantially depleted, Ben could reapply for benefits to be reinstated. After waiting several months for the application to be evaluated, and spending the last of the inheritance, Sean might regain his benefits eligibility. Unfortunately, there would be no funds left to pay for the supplemental items his parents historically provided.

Sean's situation would be dramatically different if his parents had put in place estate planning documents that included a Special Needs Trust designed to receive Sean's inheritance. The conservatorship could be avoided, and Sean's benefits would continue since a Special Needs Trust would receive Sean's inheritance. Under the traditional approach, the inheritance that should have been available to improve (or at least maintain) Sean's living situation, has placed him in a worse situation. Other than an occasional gift from Ben, once Sean regains benefits, he will have nothing more than his $20.00 per month personal needs allowance from his government check to provide the items his parents formerly covered.

Optional Approach Using Payback SNT

A second option exists for Sean and provides a result that is much better than the traditional approach, though not as outstanding as a Special Needs Trust created by his parents in their estate plans. Ben can seek permission from the court as Sean's conservator to establish and contribute Sean's inheritance to a unique form of Special Needs Trust, referred to in this article as a "Payback SNT." While this type of trust differs in several important respects from the trust Sean's parents might have established for him, it offers a way for Sean's benefits to continue while retaining his inheritance in trust for his supplemental needs. The rest of this article will discuss the two primary types of special needs trusts and the important roles each type can play in the life of a disabled loved one.

Two Main Types of Special Needs Trusts

The most common type of Special Needs Trust is established with funds of a third party and is often called a "Third Party SNT." This is the type Sean's parents should have established for him. The other type of Special Needs Trust is established with a disabled beneficiary's own funds. It is often called a "Payback SNT" because of an important provision required in this form of Special Needs Trust. While both types of trusts typically last for an individual's lifetime, are discretionary in nature, and strive to preserve the beneficiary's eligibility for government benefits, they are not interchangeable. A lawyer who concentrates in this area can advise you about the proper type needed for your family member's situation.

Primary Consideration

Medical Coverage

The primary consideration in evaluating whether a Special Needs Trust is an appropriate planning device for a family member (instead of a more traditional type of support trust) is the disabled person's present or future health care coverage situation. If the disabled person either (1) receives government benefits that are means tested (available only to persons with limited resources and income, such as Medicaid and SSI), or (2) will at some time in the future need to receive means tested government benefits, a special needs trust should be considered to receive any assets directed to that individual. Otherwise, like Sean, the disabled person could lose his eligibility upon receiving more than $2,000 in "countable" assets. A professional life care planner can help estimate the cost of a disabled person's lifetime care, taking into account benefits available from public assistance, as well as from private sources. If it is important for a disabled family member to have the choice of maintaining Medicaid and other means tested government benefits, yet still have funds to supplement these benefits, then a Special Needs Trust should be implemented into his or her family's estate plans. Different situations might call for a disabled person to have both a Third Party SNT and a Payback SNT.

Payback SNTS

The Payback SNT is used when a disabled individual has received or will receive funds that belong to him or her. As Sean's conservator, Ben could establish a Payback Trust to receive Sean's inheritance so that it would not be a countable resource. Any funds remaining in the Payback SNT at Sean's death would have to be repaid to Medicaid to the extent it had paid for Sean's care. Nevertheless, during Sean's lifetime, the funds could be used to supplement his benefits in the same manner his parents had provided during their lives. And, Ben can be the Trustee to make those decisions.

Both Third Party and Payback SNTs must be carefully drafted and administered. Because a Payback Trust contains a disabled person's own funds, additional federal requirements apply before it will qualify for benefits eligibility purposes. Generally, a person may not establish a special needs trust with his or her own assets in order to protect those assets for SSI and Medicaid eligibility purposes. An important exception to this rule exists in the federal statute authorizing the Payback SNT. It provides that a trust containing assets "available" to a beneficiary will not disqualify the beneficiary from certain public benefits if it is:

"A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1614(a)(3)) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this title."

Furthermore, the Payback SNT must be for the sole benefit of the disabled beneficiary. It cannot benefit the disabled person's spouse, children, siblings, or other family members until Medicaid is repaid when the trust terminates. Because the disabled person continues to receive public benefit while the trust continues, the result (which is like an interest free loan from Medicaid) is fair and equitable for all parties, especially the disabled beneficiary.

In addition to providing a solution to correct an accidental inheritance, a Payback SNT is sometimes used when a person is permanently disabled in a collision or other accident. Again, the decision of whether to use a Payback Trust to receive the injured person's settlement funds would be based upon how critical it is for this injured plaintiff to maintain Medicaid as a primary or secondary source of health care coverage. Absent a court order authorizing the Payback SNT, with a significant settlement, the injured person could lose Medicaid and/or SSI until the settlement funds and other countable resources were nearly exhausted.

Third Party SNTS

In contrast to the Payback SNT, the creation of a Third Party SNT is not governed by statute. This trust can even contain provisions for non disabled beneficiaries. Because more flexibility can be provided in this type of document, planning with a Third Party SNT to receive a disabled person's inheritance is a much more attractive (and economical) approach than relying on a Payback Trust to remedy a situation. As long as the trust does not contain the disabled beneficiary's own assets, there is no need to include a Medicaid payback provision. The disabled beneficiary can enjoy the supplemental and discretionary use of the trust funds, while maintaining eligibility for government benefits. At the beneficiary's death, any remaining funds can pass to other family members. In the past, some parents have resorted to completely disinheriting a disabled child or grandchild so that government benefits could continue. The Third Party SNT presents a much better solution.

A Third Party SNT only contains assets that never belonged to the disabled beneficiary. This type of Special Needs Trust might be established under the will of a parent, grandparent, sibling, or child of the disabled beneficiary, or as a stand alone document that would receive a portion of an estate. It could also be named directly to receive insurance and retirement proceeds. For a married person with Alzheimer's (or another disability indicating possible future need for Medicaid benefits in a nursing home), the husband or wife of the disabled person who wants to provide for the disabled spouse through a special needs trust must do so under a will. A stand alone form of document in that situation will not be considered as a non countable resource for determining Medicaid eligibility in the nursing home.

Suppose Sean's parents had established a stand alone Third Party SNT as part of their estate plans. Sean's grandparents could now easily designate the trust to receive assets for Sean in a protected manner. The grandparents' wills or other estate planning documents can specify his share to pass to the Trustee of the special needs trust his parents had established. If the grandparents preferred different remainder beneficiaries at the end of Sean's life, then their estate planning documents could set up a separate Third Party SNT for Sean.

Administration of Special Needs Trusts

Several important administration provisions govern special needs trusts. Whether in Third Party or Payback form, distribution of the funds for a disabled beneficiary must be within the Trustee's total discretion, regardless of whether the Trustee is a family member or a corporate trustee. If the beneficiary had a right to require funds to be spent for him or her, then the trust would be considered as "available" to the beneficiary for government benefits eligibility purposes. Also, for a beneficiary receiving SSI, the trust should not be used as the primary source of paying for the disabled person's food, clothing or shelter. The SSI check received by the individual each month must be used first for these purposes. Using the trust in this manner will cause a reduction (typically 1/3) in the person's SSI benefit and should be carefully evaluated to make sure that the beneficiary will not lose his or her SSI benefit entirely. As long as the SSI benefit is at least $1.00 for a month, full Medicaid benefits are still received.

Another important restriction when a beneficiary is on SSI is that trust funds cannot be paid directly to the disabled beneficiary. Any funds paid directly to the beneficiary will reduce the monthly SSI benefit dollar for dollar. Instead, the trust should pay to the providers of services and goods for the beneficiary.

Types of Distributions

While restrictions in a special needs trust may possibly exceed those in a more traditional support trust, this must be weighed against the need for continued Medicaid and/or SSI. While the trust should not pay for things the government is providing, it can be used to supply many things that will enhance and enrich a disabled family member's quality of life. It can provide virtually anything beneficial to the disabled person that is not being provided through other sources, such as SSI or private health insurance. Some examples include costs of movies, sporting events, camping, travel (including the costs of a traveling companion), improvements to a residence for the disabled person's needs, transportation (including purchase or lease of a specially equipped vehicle), insurance and maintenance payments, computers, musical and entertainment equipment, and hobbies. The funds can also be used for training programs, therapy, and any other use to better the beneficiary's quality of life.

Final Considerations

Because the federal statute recognizing special needs trusts has been around less than 10 years, not everyone is aware of the flexibility and benefits these trusts provide for disabled family members or how to establish such a trust. When making any financial, settlement, or estate planning decisions, special consideration must always be given to the protection of a disabled family member. Because the special needs trust may not be appropriate for every situation, many questions need to be asked to see if it is right for your family. When your responsibility to a disabled loved one cannot end, a special needs trust should be considered.

A word of caution is necessary; this area of the law can be quite complex and full of pitfalls. Any person interested in the special needs trust would therefore benefit from consulting with an estate planning or government benefits lawyer familiar with these issues.