Estate Planning: “Special Needs Trusts” Part III (Three-part Series)

PART III:  Third-Party Special Needs Trusts (or “Supplemental Needs Trusts” in Minnesota)

This is the third and final entry in a three-part series on special needs trusts – trusts able to provide additional or “special” funds for a disabled person who has limited resources and may already be reliant on government assistance.

Trusts, in general, have a grantor (the person giving the funds), a beneficiary (the person receiving the funds), and a trustee (the person controlling and caring for the funds). Special needs trusts, however, have very stringent requirements and rules. It is advisable to seek legal guidance from an experienced attorney when considering this option.  This three-part series is meant as a basic introduction (or overview) to special needs trust planning and should help you start a dialogue with a professional. If you wish to know more, talk to an attorney and discuss your situation and concerns.

Special needs trust education is for anyone making an estate plan – not just for those who currently know they have a potential beneficiary with special needs.  Things may change and your estate plan may need to be updated down the road. This blog entry  (Part I: First-Party Special Needs Trusts, and Part II: Pooled Special Needs Trusts) deals with the different species of special needs trusts, each with their own specific set of requirements and rules.

Individuals with special needs, in this case, are people who qualify for governmental benefits as a result of their special needs, meet the Social Security Administration’s (SSA) definition of “disabled,” and have limited resources (income and assets) available to them. A special needs trust is intended to benefit these individuals.

A problem arises when an individual with special needs who is receiving governmental benefits inherits, wins, or otherwise obtains assets. They can be disqualified from public assistance as a result of the assets received because they now exceed the income and/or asset limits. A special needs trust can protect these types of assets, but in very particular ways. The purpose of a special needs trust is to provide funding for expenses not already covered by the public benefits – not replacing or enhancing them.

Here are some of the requirements of a trust to qualify as a “special needs trust”:

• No providing for basic support, like food or shelter;
• Trustee must have complete control over distribution of the assets in the trust;
• No right of beneficiary (or anyone acting on their behalf) to withdraw or distribute from the trust;
• No right of beneficiary to amend or revoke the trust;
• Trustee must make distributions for the benefit of the beneficiary but cannot distribute cash directly to the beneficiary.

In addition to these requirements, the law also cares about whose money is used to fund the trust and how the trust is managed.  This blog entry, Part III, elaborates on Third-Party Special Needs Trusts, which, in Minnesota, are also called Supplemental Needs Trusts and are funded by someone else other than the beneficiary (or disabled person). Third-party special (or supplemental) needs trusts are defined by Minnesota State Law (as opposed to federal law for first-party and pooled special needs trusts mentioned in Parts I and II). Below is a link to Minnesota’s Department of Human Services program manual that you may find helpful:

http://hcopub.dhs.state.mn.us/19_25_35_35.htm

In Minnesota, a supplemental needs trust has very particular requirements:

• Purpose: “To provide for the reasonable living expenses and other basic needs of a person with a disability when benefits from publicly funded benefit programs are not sufficient to provide adequately for those needs.” The trust may allow distributions to cover all or part of the beneficiary’s reasonable living expenses;
• Beneficiary must have been established as “disabled” before the supplemental needs trust is established;
• Disability must be established through SSA criteria;
• Funded with assets belonging to a third-party (not the disabled person’s spouse);
• Established by someone other than the beneficiary (someone not obligated to the beneficiary as a parent or a spouse);
• May be funded during the lifetime of the grantor or upon the grantor’s death;
• Trustee can be a family member or friend, or professional (highly recommended!), but cannot be the beneficiary;
• If established after July 1, 1993, there are exclusions for age and living arrangements (“Supplemental Needs Trusts are not enforceable for beneficiaries age 65 or older who reside in a state institution or nursing facility for six months or more and, due to the client’s medical need for care in an institutional setting, there is no reasonable expectation the beneficiary will ever be discharged from the institution or facility”). With the exception of group home (group residential housing – GRH), the age and living arrangements of the beneficiary of the trust may change the availability of the trust as an asset;
• Disbursements must be supplemental (meaning, the trustee has discretion to determine timing and amount of disbursement IF not replacing or reducing public benefits – public benefits must be used first);
• Upon the death of the beneficiary, the trust may provide for other beneficiaries;
• There is no “pay-back  provision” because a third-party is providing the funds, not the beneficiary.

If this type of trust seems to fit your situation and your concerns for your family members, talk to an attorney who can assist you in deciding if this is for you.

ALL READERS:  This blog is not, nor shall it be deemed to be, legal advice or counsel. This blog does not create an attorney-client relationship with any reader.  It is designed to encourage thoughtful consideration of important legal issues with the expectation that readers will seek professional advice from a licensed attorney.