Supplemental Needs Trusts
Americans are living longer than they did in years past, including those with disabilities. According to one count, 480,000 adults with mental retardation are living with parents who are 60 or older. This figure does not include adult children with other forms of disability nor those who live separately, but still depend on their parents for vital support.
When these parents can no longer care for their children due to their own disability or death, the responsibility often falls on siblings, other family members, and the community. In many cases, expenses increase dramatically when care and guidance provided by parents must instead be provided by a professional for a fee. Planning by parents can make all the difference in the life of the child with a disability, as well as that of his or her siblings who may be left with the responsibility for caretaking (on top of their own careers and caring for their own families and, possibly, ailing parents). Any plan should include the following elements:
1. A Plan of Care. Where is the disabled person going to live when he or she can no longer live with you or one their own? Is another family member willing/able to take him or her in? A group home? Who will make the decision? Who will monitor the care received? It’s never too soon to begin answering these questions and making sure that the living and support arrangements are in place. In some cases, it can ease the transition for all concerned if the disabled person moves to the new living arrangement while his parents or caregivers can still help with the process. In many parts of the country, non-profit organizations and private consultants can help set up the plan, research available options, and assist in the move.
It will help everyone involved if parents/caregivers create a written statement of their wishes for the disabled person’s care—called a Letter of Intent of Special Letter of Instruction. As parents/caregivers, you know him better than anyone else. You can explain what helps, what hurts, what scares, and what reassures him. When you’re gone, your knowledge goes with you unless you intentionally and specifically create a plan to pass it on.
In almost all cases where anyone wishes to leave funds at death to a disabled person, this should be done in the form of a trust. Trusts set up for the care of a disabled person generally are called “supplemental” or “special” needs trusts, which are described in more detail below.
Money should not go outright to the disabled person, both because her or she may not be able to manage it properly but also because receiving the funds directly may cause him to lose public benefits, such as Supplemental Security Income (SSI) and Medicaid. Often, these programs also serve as the entry point for receiving vital community support services.
Some individuals choose to avoid the complication of a trust by leaving their estates to one or more of their healthy children or another relative, relying on them to use the funds for the benefit of the disabled individual. Except in the case of a very small estate, this is generally not a good idea. It puts the disabled person at risk—there are no guarantees the recipient will be able to perform as intended. The assets left to someone other than the disabled individual may be subject to claims by creditors and at risk in the event of divorce or bankruptcy. Finally, the individual who receives the funds may die before the disabled child without proper planning for the disabled person in their own estate plan.
2. Life Insurance. A parent with a disabled child should consider buying life insurance to fund the supplemental needs trust set up for the child’s benefit. What may look like a substantial sum to leave in trust today may run out after several years of paying for care the parents had previously provided. The more resources available, the better the quality of life that can be provided for the child. And if both parents are alive, the cost of “second-to-die” insurance—payable only when the second of the two parents passes away—can be surprisingly low. The good news is that advance planning for a disabled child can make a significant difference in the child’s life. You just have to take the first step.
Special Needs Trusts
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.
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.
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.
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.
Choosing a trustee is very important as part of the creation of a special needs trust. Most individuals do not have the expertise to manage a trust, with all of its requirements, responsibilities and potential liabilities. An alternative to choosing a family member or friend as trustee is to retain the services of a professional fiduciary, such as a certified public accountant or corporate trustee. In some instances, it may be appropriate to have a family member and professional fiduciary serve as co-trustees.
In addition, a trust may contain a provision for a “trust protector” who has the power to review accountings and to hire and fire trustees. Trusts may also contain provisions for “trust advisors” who instruct the trustee on the beneficiary’s needs.