Elder Law Matters

SPECIAL NEEDS TRUSTS

By: Joseph T. Buxton, III, CELA*
*Certified Elder Law Attorney by the National Academy of Elder Law Attorneys

One of the most serious mistakes an individual can make in their estate planning is to leave assets directly to an individual who is incapacitated or disabled. In many cases, these individuals are eligible for health care benefits or are receiving public assistance, such as Medicaid, social security supplemental payments, housing allowances and the like. If this individual were to receive a gift, either outright, or by will or trust, that gift, in all likelihood, will disqualify the individual immediately from any further public assistance.

For an individual to qualify for Medicaid or other public benefits, the individual must demonstrate that they have virtually no assets and that their ability to earn income or accumulate assets is severely restricted. Should the individual receive a gift in excess of $2,000.00, that gift may disqualify the individual from further public assistance until those assets are spent down to an amount less than $2,000.00. Therefore, it is extremely important, that in an estate plan, you include provisions that prevent assets passing directly to a beneficiary who is receiving or who may be eligible to receive public assistance in the future. This protective plan would include minor children, who, when they become adults will be dependent upon public assistance for their maintenance and support even though their parents are providing for them currently.

There are several ways these beneficiaries can be protected. For example, when drafting a will, provisions can be included to provide that if a beneficiary is disabled, incapacitated, receiving public benefits, or may in the future receive public benefits, that their gift will be withheld by the Executor as a Trustee and be held in a “testamentary trust” for the benefit of the individual. The provision provides that these assets may not be used in any way that would disqualify the beneficiary from benefits they would otherwise be entitled to from the government or other sources.

However, a better way to protect a beneficiary with special needs would be to create an inter vivos (living) Special Needs Trust (SNT). This type of trust represents a contract between the Grantor (the person setting up the Trust) and the Trustee (the manager of the trust assets) containing specific provisions that would restrict the distribution of assets from the trust for the beneficiary if that distribution would disqualify the beneficiary from public assistance. In other words, the Trust becomes a supplemental needs trust intended to supplement public assistance and pay for those things that Medicaid, Social Security and other benefits do not provide for.

The SNT agreement can name back up trustees to manage the assets in the event that the initial trustee becomes unable to function or dies. This guarantees that the trust will continue to function during the beneficiary’s entire lifetime. The document would also provide for the distribution of those assets to other family members or beneficiaries at the death of the disabled party. This type of SNT is funded with your money, not the funds of the beneficiary.

The question comes up “What happens if the beneficiary does in fact inherit assets under a relative’s will or trust? Can anything be done to protect those assets from disqualifying the individual from their assistance?”

The answer is “Yes”. The social security law of the United States includes provisions for the creation of a Special Supplemental Needs Trust for individuals under 65 years of age who receive an inheritance, a personal injury settlement or other gift, which would disqualify them from their public assistance. This type of trust is known as an Pay Back Trust. The law requires that this trust be established by a parent, grandparent, guardian, conservator or a court for the disabled person. The difference in this type of SNT is that the rules require that at the death of the special beneficiary any assets remaining in the trust must pass to the State to reimburse the State for medical services provided to the individual during their lifetime. In the meantime, however, the trust fund can be used for a wide range of items to supplement the individuals’ standard of living and provide for a more comfortable life. It usually includes provisions to permit the trustee to provide those things that Medicaid and social security cannot pay for, such as experimental medical treatment, travel, entertainment, companionship, appliances and those things needed beyond everyday support.

When developing an estate plan, we recommend that clients include a Special Needs Trust Provision in their Individual Revocable Living Trust or their will, even if presently there are no present special needs. The parent may leave the healthy children their shares outright and have the Trustee retain a separate share in trust for the lifetime of the incapacitated or disabled child, or other beneficiaries.

As noted above, some clients will create a “stand alone” Special Needs Trust for the disabled individual and begin funding it during lifetime. This type of trust can be fully funded at the parents’ death by their wills or their individual trust. It can also be funded by the will or trust of other family members. For example, one way to fund the SNT is have a parent deed their home to the trust but retain life rights, so that when the parent dies the SNT will own the home and provide a home for the special needs individual during their lifetime, without jeopardizing their entitlement to other benefits.

If you have a family member who has special needs, it is very important that you and all members of the family that might leave an inheritance for this individual, make special plans to prevent that inheritance from jeopardizing the individuals public benefits. The use of a Special Needs Trust is the proper route to accomplish this result.