Special Needs Trust: Who, What, Why, and How

Tuesday, November 9, 2010

What is the function of a Special Needs Trust?
Special Needs Trusts (hereafter, SNT) are used primarily as a means of preserving a disabled person’s access to government-subsidized health care and SSI benefits. The SNT is a well-accepted estate planning technique that is logical - even essential - in our country’s health care system. Many people who do not qualify for Medicaid are left with serious financial burdens from health care costs. For example, if parents leave money directly to an adult disabled child, the gift, if large enough, will disqualify the child from SSI and so from Medicaid until the money is used up. This is where the special needs trust comes in. It allows a person with special needs to enjoy the benefits of property received from others without losing SSI and Medicaid.

To qualify for SSI and Medicaid (MediCal in California), a person’s monthly income usually must be no more than about $600 to $900, and the person must own less than $2,000 worth of liquid assets (bank accounts, securities, and the like) and many other types of property. Someone whose property is worth more than the limit is not eligible for benefits.

How does the SNT protect the disabled person’s benefits?
The beneficiary of a properly drafted special needs trust never has a legal claim to property in
the trust. This means that the money will not be counted as the beneficiary’s resource, and so it will not interfere with eligibility for benefits. The funds from the trust can be used the disabled person’s benefit for any good or service except food or shelter.

A special needs trust is an arrangement under which a person (called the “grantor” or “settlor”) places property in the hands of a manager (the “trustee”). Typically, the grantor of a special needs trust is also the trustee while he or she is alive and names one or more other persons to be successor trustees, to take over as trustee when the grantor dies or becomes incapacitated. All persons who serve as trustee are legally obligated to follow the terms of the trust document to use the property for the benefit of the disabled person identified in the trust document (the “beneficiary”).

What are the basic characteristics of the SNT?
1. The trust document gives the person serving as trustee absolute control over when and how the trust property is spent, as long as it is spent for the sole benefit of the beneficiary, and
2. The trust document expressly states that the grantor intends for the property in the trust to supplement, but not replace, the basic benefits and services provided by SSI and Medicaid.

By including these two provisions in the trust document, we ensure that SSI and Medicaid will not treat the property in the trust as a resource of the beneficiary.

How can SNT assets be used?
An SSI grant is intended to provide only food and shelter. Expenditures for anything else are
supplementary and do not affect the beneficiary’s eligibility for a full SSI payment. Generally, trust funds are used for services (hiring a personal attendant, for example) or experiences (travel, for example) rather than to buy items of property. That is because a beneficiary who owns too much valuable property will go over the resource limit and become ineligible for SSI and Medicaid. A trustee who used trust funds for a vacation home would not be doing the disabled person a favor — it would result in termination of public benefits. That is directly contrary to the express terms of the trust; therefore, such a purchase is not authorized.

How can SNT assets NOT be used?
A trustee sometimes may desire to use trust funds for items classified as food and shelter. In some cases, buying these items with trust money is perfectly fine. For example, the SSI program does not pretend to provide adequate assistance for special dietary needs. So if a beneficiary needs unusually pricey food or nutritional supplements, this extra cost can often be met from the special needs trust without affecting the SSI grant.

Shelter is a special case. Special needs trusts commonly allow the person serving as trustee to pay for rent or any other basic need that the trustee deems necessary for the beneficiary’s health and welfare under the circumstances if it isn’t already being met by SSI or Medicaid, and if it doesn’t make the beneficiary ineligible for those benefits altogether.

How and when is the SNT terminated?
The special needs trust ends when it is no longer needed — commonly, at the beneficiary’s death. There are four reasons to end a special needs trust:
• Trust funds are depleted.
• The beneficiary no longer needs government benefits.
• The beneficiary is no longer eligible for government benefits.
• The beneficiary dies.

(This information adapted from nolo.com and Advising the Elderly or Disabled Client, 2nd Ed., Lawrence A. Frolik and Melissa C. Brown.)

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