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

PART I:  First-Party Special Needs Trusts

This is the first 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 (and the next two, Part II: Pooled Special Needs Trusts, and Part III: Third-Party Special Needs Trusts or Supplemental Needs Trusts in Minnesota) 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 to replace or enhance that funding.

Here are some of the requirements for 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 I, elaborates on First-Party Special Needs Trusts (or “(d)(4)(A)” trusts for short, so nicknamed from the federal law on the subject:  42 U.S.C. § 1396(p)(d)(4)(a)).

First-Party Special Needs Trusts are “self-settled,” which means the funds used to fund the trust belong to the beneficiary him or herself (the special needs individual). The beneficiary must create the trust when they are under the age of 65. Here are some of the additional requirements and options:

• Must be for the sole benefit of the disabled person;
• Can be funded by inheritance, or proceeds from a lawsuit or a settlement;
• Can be funded with many types of assets, including real estate, personal property, and investment accounts;
• Grantor must be parent, grandparent, guardian, or the court. (Although this is a “self-settled” trust, the grantor cannot be the beneficiary him/herself);
• Must have a “pay-back provision.”  This provision requires the Trustee upon termination of the trust to reimburse the State for any medical assistance benefits paid on behalf of the beneficiary during the beneficiary’s lifetime. (Some administrative expenses my be paid first and funeral expenses may be purchased out of the trust before the beneficiary’s death, but other creditors must wait in line after MA);
• Trustee can be anyone, including a parent, relative, or friend, but because it’s so easy to cause the beneficiary’s disqualification unintentionally, it is advisable that the Trustee be experienced in this area.

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.  Next week will provide a look into Pooled Special Needs Trusts in Part II of this three-part series.

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.