Special Needs Planning

What is a Special Needs Trust?

Special needs trusts (also sometimes referred to as “supplemental needs” trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and still be eligible for certain government programs. Special needs trusts are drafted so the funds are not an “available resource” in determining eligibility for public benefits. As their name implies, special or supplemental needs trusts are not designed to provide basic support, but instead to pay for comforts and “luxuries” that are not available from public assistance. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.)

Most often, special needs trusts are created by a parent or other family member for the benefit of a disabled loved one, whether that person is a minor or adult. Such trusts also may be set up in a will or living trust as a way for an individual to leave assets to a disabled relative. Sometimes, the disabled individual can create the trust himself, depending on the program for which he or she seeks benefits.
Special needs trusts generally fall into two categories—first party (or self-settled) trusts and third party trusts.  Within each of these categories are subcategories of trusts.

What are the different types of Special Needs Trusts?

First Party Trusts

A first party or “self-settled” trust is one that is established with the trust beneficiary’s own money.  Generally this money will be received as the result of an accident or medical malpractice lawsuit, or unexpected gift or inheritance.

Each public benefits program has restrictions that special needs trusts must meet so the beneficiary’s continued eligibility for public benefits is not jeopardized. Medicaid and SSI both have stringent income and resource restrictions making it difficult for a beneficiary to have substantial assets and still retain eligibility for benefits. But, both programs have “safe harbors” permitting the creation of a special needs trust.  These safe harbor trusts fall into 3 primary types; Disability or d4A trusts, Qualified Income or d4B trusts and Pooled or d4C trusts.

All first party trusts have mandatory “payback” provisions which require the trust to reimburse the governmental agency for benefits provided by Medicaid.  This is their primary disadvantage.

Disability or (d)(4)(A) Trust

The first of the self-settled trusts is called a Disability or d4A trust referring to the authorizing Federal statute. This trust will be established with the assets of a disabled individual under age 65 by a parent, grandparent, legal guardian or by court order. The trust assets may be used for the sole benefit of the beneficiary and requires a payback to Medicaid at the end of the beneficiary’s lifetime.

Qualified Income or (d)(4)(B)Trust

The next safe harbor trust is the Qualified Income or d4B trust.  This trust is sometimes also referred to as a Miller Trust.  Primarily the Qualified Income Trust or (QIT) is used for medicaid nursing home related programs where the applicant is over the income limitation.  The excess income is placed in the QIT and the individual remains eligible for their government benefits.  A QIT may be created by the beneficiary, the beneficiary’s spouse (without a power of attorney), another individual under the authority of a power of attorney or by court order.  This trust requires Medicaid payback at the end of the beneficiary’s lifetime.

Pooled or (d)(4)(C) Trust

The last of the safe harbor trusts is the Pooled or d4C trust.  These trusts pool the resources of many disabled beneficiaries, and the trusts assets are managed by a non-profit organization. Unlike individual disability trusts (d4A), which may be created only for those under age 65, under current Florida Medicaid law pooled trusts may be created for beneficiaries of any age and may even be created by the beneficiary, if competent. In addition, although technically a “payback” trust, at the beneficiary’s death Medicaid does not have to be repaid as long as the funds are retained by the trust for the benefit of other disabled beneficiaries.

However, pooled trusts have recently come under attack by the Social Security Administration for over age 65 beneficiaries. As a result, an over age 65 applicant for SSI benefits cannot effectively ue a pooled trust to qualify for benefits.

Third Party Trusts

Third party trusts are trusts created with the assets of someone other than the trust beneficiary—a third party.  Third party trusts can be created as “stand-alone” trusts of as “stand-by” trusts.  A primary benefit of a third party trust is there is no payback provision at the end of the beneficiary’s lifetime.

Stand-alone Trust

A stand-alone trust is created as a form of living trust—while the trustmaker (also referred to as a settlor, trustor or grantor) is living.  A stand-alone trust can be revocable (capable of being amended or revoked) or irrevocable (cannot be amended or revoked).  The type of stand-alone trust that is best will depend on the needs and circumstances of the individual trustmaker.  Each stand-alone trust can be customized to the needs and desires of the trustmaker to ensure that the beneficiary is getting the best possible quality of life. Another possible benefit of the stand-alone trust is if the law were to change and the trust was already in existence, the likelihood is it would still be effective despite the change to the law.

Stand-by Trust

A stand-by trust, also known as a testamentary trust, is created as part of a will or living trust, generally of a parent or family member of the disabled individual.  Like the stand-alone trust, it can be customized to meet the needs and desires of the trustmaker regarding the quality of life of the beneficiary.  Possible drawbacks to stand-by trusts include the delays associated with probate for those created in a will and there are no assurances the laws won’t change in a way that affect the viability of a stand-by trust.

Our next Special People, Special Planning Workshop will be held on Tuesday, June 20, 2017 at 6:00 p.m. Reservations required, click here to register today. 

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