BASICS OF SPECIAL NEEDS TRUSTS

Special needs trusts, sometimes called supplemental needs trusts, are trusts created for disabled or elderly persons which are intended to “supplement but not supplant” those benefits provided by public or private assistance programs. A common element of all special need trusts is maintaining eligibility for means tested government assistance programs while creating a fund which can be used to provide care and services not otherwise available from any public or private programs.

 

If you have any questions concerning Special Needs Trusts, call our office for a free telephone consultation: (305) 274-0955.

 

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A. Types of Special Needs Trusts

1. Third Party Special Needs Trust
2. Self-Settled Special Needs Trust

 

B. Resource Limitations for the Supplemental Security Income Program

 

C. Establishing a Special Needs Trust

1. Self-Settled Special Need Trusts
2. Pooled Trusts
3. Third Party Special Need Trusts

 

D. Advantages of a Special Needs Trust

 

E. Drafting a Special Needs Trust — Income Distribution Rules

1. Supplemental Security Income Distribution Rules
2. Drafting and Administering a Special Needs Trust

 

FAQs

 

 

A. Types of Special Needs Trusts

 

 1. Third Party Created Special Need Trust.

 

Non Spousal Special Needs Trust

 

A third party special needs trust is a trust created by a donor for the benefit of another individual for the purpose of creating a pool of funds which will be available to the individual without disqualifying the individual from receiving public assistance.  The most common form of third party special needs trust is a trust created by a parent for the benefit of an adult disabled child.

 

The trust may be created while the donor is alive or may be created at death through a testamentary trust under the donor’s will or revocable trust.

 

Spousal Special Needs Trust

 

A spouse of a disabled individual may wish to establish a testamentary trust for the benefit of the disabled spouse in the event of the premature death of the well spouse to preserve the disabled person’s eligibility for public assistance. This trust known as a “Qualifying special needs trust” is created under the will of the well spouse.

 

 2. Self-Settled Special Needs Trust.

 

A self-settled special needs trust is a trust established for the benefit of a disabled individual and funded with that individual’s own funds. The purpose of the trust is to maintain the individual’s eligibility for public assistance programs. Unlike the third party special needs trust, the transfer of funds to a self-settled special needs trust will be treated as an uncompensated transfer and disqualify the person from many public assistance programs, such as SSI and Medicaid, unless the trust meets certain statutory federal guidelines when created.

 

The typical self-settled special needs trust is funded either from the proceeds of a personal injury settlement, a property settlement agreement pursuant to a divorce, alimony payments or an inheritance.

 

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B. Resource Limitations for the Supplemental Security Income Program

 

The Supplemental Security Income program (SSI) is a needs based federal program which provides benefits to disabled individuals having limited income and resources. To be eligible for SSI, the individual must be blind or disabled, a United States citizen or an alien lawfully admitted for permanent residence in the U.S. In most states eligibility for SSI automatically creates eligibility for Medicaid.

 

Under the Supplemental Security Income program a disabled individual is permitted to retain no more than $2,000 in countable assets to be eligible for SSI. If the disabled person is a minor and living in a two parent household the parents are permitted to retain an additional $3,000 in countable assets. The Foster Care Independence Act of 1999 imposed a period of ineligibility of up to three years on the uncompensated transfer of assets when an individual applies for SSI. The transfer of assets to a properly drafted special needs trust is an exception to the transfer penalty rules. However, unlike Medicaid, the exception to the transfer penalty rules is not available to an individual 65 years of age or older who applies for SSI.

 

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C. Establishing a Special Needs Trust

 

Under The Omnibus Reconciliation Act of 1993 (“OBRA ‘93") Congress imposed certain transfer penalties by creating a period of ineligibility on the uncompensated transfer of assets when an individual applies for Medicaid. Under OBRA ‘93 certain trusts were specifically excluded from the transfer penalty rules which normally apply to trusts. Two trusts specifically excluded are testamentary trusts and inter vivos third party created trusts where the person establishing the trust is not the beneficiary or the beneficiary’s spouse, and is not acting with legal authority or under the direction of the beneficiary or spouse.

 

In addition, OBRA ‘93 specifically exempted three type of trusts which comply with the provisions of 42 U.S.C. 1396p(d)4 from the transfer penalty rules . These trusts are commonly referred to as “d4(A)”, “d4(B)” and “d4(C)” trusts. In essence, if property, or income in the case of a d4(B) trust, is transferred to a testamentary or inter vivos third party trust or a “1396p(d)4(A) or (C)” trust, there is no period of ineligibility created and the trust beneficiary may immediately apply for Medicaid.

 

 1. Self-Settled Special Need Trusts “42 U.S.C.1396p(d)4(A).”

 

In designing a self-settled special needs trust, the drafter must not only comply with the requirements of OBRA ‘93, but must also take into consideration the rules set forth in the Program Operations Manual System (POMS) published by the Social Security Administration which contain the operating procedures for SSI.

 

A. Statutory Requirements of the Self-Settled Special Needs trust.

 

A self-settled special needs trust for a disabled individual will meet the statutory requirements where:

 

1. The trust is funded with the assets of an individual under 65 years of age at the time the trust is established. The trust may continue after the individual reaches age 65, but any new contributions to the trust, other than interest, dividends, and payments under an annuity contract owned by the trust prior to the individual reaching age 65, will not fall within the exemption.
2. The beneficiary is disabled as defined under the Social Security Act.
3. The trust is established for the benefit of the individual by the individual, a parent, grandparent, legal guardian or the court.  The Special Needs Trust Fairness Act changed the law to allow the individual himself/herself to establish his/her own Special Needs Trust.
4. Upon the death of the beneficiary, the trust must provide that the state will receive all amounts remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the individual under a State Medicaid plan. Where a beneficiary has received Medicaid benefits in more than one State, and the remaining assets are insufficient to reimburse all the States, the trust must provide that each State will be reimbursed in proportion to the total amount of Medicaid benefits paid by all the States.

 

B. Requirements of the Social Security Administration.

 

In addition to the statutory requirements of OBRA ‘93, the trust must satisfy the rules set forth under the Program Operations Manual System (POMS) of the Social Security Administration when the beneficiary is applying for or receiving SSI.

 

1. Right to Compel Distributions.

 

If an individual does not have the legal authority to revoke the trust or direct the use of the trust assets for his or her own support and maintenance, the trust principal is not the individual’s resource for SSI purposes.”  The trustee must have sole and absolute discretion over the distribution of income and principal of the trust for purposes of both SSI and Medicaid.

 

2. Trust must be Irrevocable.

 

If an individual has legal authority to revoke a trust and use the funds to meet his or her food or shelter needs, or if the individual can direct the use of trust principal for his or her support and maintenance the principal of the trust is an available resource for SSI purposes. However, if a trust is irrevocable by its terms and under State Law, and cannot be used by an individual for support and maintenance, it is not an available resource. Under state law the trust must also be irrevocable for Medicaid purposes.

 

In some states a trust which names the individual’s “heirs at law” as the residuary beneficiaries of the trust is considered to be revocable notwithstanding the terms of the trust. This result may be avoided by designating the individual’s children, issue, descendants, or a specifically named person as the residuary beneficiaries of the trust.  Under the New York Regional POMS a named residual beneficiary can include the term “issue” only if living and an issue of the beneficiary of the trust. The Atlanta Regional POMS cited below does not contain this requirement.

 

The Atlanta Regional POMS states that if the trust provides that upon the death of the beneficiary any trust property remaining after Medicaid is repaid will go “to my estate” or uses “some other non-specific general term,” such as giving the beneficiary a power of appointment by Will over the disposition of trust assets, this is not specific enough to identify the remainder beneficiaries and, thus, the trust will be considered revocable. At present, it appears that this result may be avoided by first making a specific bequest of a nominal sum of money to a named individual and, thereafter, giving the beneficiary a power of appointment by Will over the disposition of the remainder of the trust assets.  By granting the beneficiary a power of appointment by Will, the beneficiary retains control over the ultimate disposition of his or her property. Additionally, the beneficiary avoids imposition of a gift tax on funding of the trust.

 

In Florida the Doctrine of Worthier Title has been repealed under Florida Statute and therefore the above regional POMS will not apply.

 

2. Pooled Trusts.

 

A pooled trust is a trust established and administered by a nonprofit association which contains the assets of many individual participants. A pooled trust is used where the individual is 65 years of age or older and by law cannot establish a self-settled trust or the amount of money involved does not warrant the expenses associated with creating a self-settled trust.  However, Social Security  will not permit an individual 65 years and older to establish a Pooled Trust account if the individual is on SSI.

 

A. Statutory Requirements of a Pooled trust.

 

A pooled trust for a disabled individual will meet the statutory requirements where:

 

1. The trust is established and managed by a non-profit association.
2. The trust maintains a separate account for each beneficiary, but assets may be pooled for purposes of investment and management.
3. Accounts are established for the sole benefit of a disabled individual by the individual, a parent, grandparent, or legal guardian of the individual, or by a court. There is no age limitation as with a self-settled  “d4(A)” trust, unless the applicant is on SSI. Once assets are placed in the trust the individual may apply for Medicaid. However, while the individual may apply for Medicaid, under The Foster Care Independence Act of 1999 if the individual is 65 years of age or older the transfer penalty rules will apply if the individual applies for SSI.
4. The account is established with assets belonging to the disabled individual.
5. The trust provides that any funds remaining in the account at the death of the beneficiary, which are not retained by the trust, will be used to reimburse the State Medicaid plan to the extent of the medical assistance paid by the State.

2. In order to maintain the disabled person’s eligibility for public assistance, the beneficiary must not have the legal authority to revoke the trust or direct the use of the trust assets.

 

B. Requirements of the Social Security Administration and Medicaid.

 

As with the self-settled trust, under the POMS, the pooled trust must be irrevocable and the beneficiary cannot have the right to compel distributions from the trust.

 

3. Third Party Created Special Need Trusts.

 

A third party special needs trust is a trust which is usually created by a parent or grandparent for the benefit of a disabled family member.

 

A. Purpose of Trust.

 

The purpose of the trust is to preserve public benefits by controlling distributions from the trust, provide for financial management of trust assets after the death of the parents, and in some instances, allow the disabled individual to receive services only available to Medicaid recipients.  A third party special needs trust is an alternative to simply disinheriting the child, making gifts to the child which would disqualify the child from means tested public assistance programs, or making gifts to a sibling with the understanding (hope) that the sibling will provide for the disabled child.

 

B. Legal Requirements.

 

1. A third party special needs trust may be set up either during the settlor’s lifetime or as a testamentary trust at death. If set up as an inter vivos trust, the trust may either be revocable or irrevocable depending on the settlor’s income and estate tax objectives. If the trust is revocable, income from the trust will continue to be taxed to the settlor and the value of the property held in the trust will be included in the settlor’s estate at death.

 

If the trust is set up by a parent during the parent’s lifetime, under the parent to child deeming rules, the income of a parent required by law to support a minor child is considered that of the disabled individual and reduces the monthly benefit the individual may receive from SSI.  However, a portion of the parent’s income may be set aside to meet the needs of the parent and other family members.

 

2. In order to maintain the disabled person’s eligibility for public assistance, the beneficiary must not have the legal authority to revoke the trust or direct the use of the trust assets.

 

C. Medicaid Reimbursement.

 

The main advantage of the third party created special needs trust, over a self-settled trust, is that at the death of the beneficiary assets held in the trust are not required to be used to reimburse the state for public assistance furnished the beneficiary during his or her lifetime and the entire corpus of the trust may pass to other family members.

 

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D. Advantages of a Special Needs Trust

 

1. The individual is able to secure immediate eligibility for public assistance such as SSI and Medicaid.
2. While on Medicaid the individual is able to obtain services at significantly lower cost than the private pay rate.
3. Some programs and services are only available through the Medicaid program.
4. Funds held in the trust may be used to supplement those services not provided by public assistance creating a better quality of life.
5. In a self-settled trust any assets remaining at the death of the beneficiary after the payment of the Medicaid lien, taxes, debts and expenses will pass to the remainder beneficiaries. All funds remaining in a third party created special needs trust pass to the beneficiaries after the payment of taxes, debts and expenses.

 

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E. Drafting a Special Needs Trust — Income Distribution Rules

 

In drafting the distribution provisions of a Special Needs Trust the attorney must take into consideration the income distribution rules set forth in the Program Operations Manual System (POMS) published by the Social Security Administration.

 

Interrelationship of SSI, Medicaid, and the In-kind Support and Maintenance Rules.

 

Supplemental Security Income (SSI) is a federal program which pays a monthly income to disabled individuals who are financially needy. Florida and other states have agreed to permit the Social Security Administration, which determines eligibility for SSI, also to determine eligibility for Medicaid for these individuals. A disabled person who receives at least $1 of SSI in a given month automatically qualifies to receive Medicaid.

 

1. Supplemental Security Income Distribution Rules.

 

Cash payments to the individual and payments made directly to third party providers from the trust affect SSI as follows:

 

1. Cash payments made directly to the disabled individual are considered unearned income and reduce the monthly SSI check dollar for dollar.
2. Money paid directly to a third party to provide the disabled individual with food or shelter, known as in-kind support and maintenance, reduces the monthly SSI check either under the "one-third reduction rule" or the "presumed maximum value rule."
3. Money paid directly to a third party to provide the disabled individual with items other than food and shelter does not reduce the individual's monthly SSI. These may include third party payments for medical expenses, travel, nursing and attendant care.

 

2. Drafting and Administering a Special Needs Trust.

 

In drafting the distribution provisions of a special needs trust the "in-kind support and maintenance rules" make it clear that cash distributions and money paid directly to third party providers for food and shelter reduce the amount of the monthly SSI check the individual will receive. However, so long as the income received by the disabled individual, including in-kind support and maintenance, is less than the federal benefit rate for the month, the individual will retain SSI and, more importantly Medicaid.

 

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