Special Needs Trust & Pooled Trusts Explained
SNT assets can be used to purchase a home for the beneficiary, services that Medicaid does not cover (including special therapies, wheelchairs, handicap accessible vans and mechanical beds), recreational and cultural experiences and, for the most part, any services or items that would enrich the beneficiary’s life. Our attorneys are not only trained in handling simple estate matters, we take care of complex estate litigation in the event of a contest of the estate, death, probate, fraud, or many other complex estate issues in Nassau County, Suffolk County, Queens County, Bronx, Westchester, Richmond County, Manhattan and Brooklyn Kings County New York. Several requirements must be met when establishing a SNT. First, the trustee must be given absolute control over the distribution of the trust assets. Neither the beneficiary nor anyone acting on his behalf can demand distributions be made from the trust. Second, the beneficiary cannot have authority to revoke or amend the trust; otherwise the trust assets would be deemed an available resource to the beneficiary, and he would lose his public benefits. Third, the trustee should not give cash outright to a beneficiary receiving SSI, as this would cause an immediate dollar-for-dollar reduction or loss of public benefits.
Generally speaking, there are three types of SNTs: (a) a first party special needs trust; (b) a pooled special needs trust; and (c) a third party supplemental needs trust.
First Party Special Needs Trusts
A first party SNT is funded with assets owned by the trust beneficiary. A first party SNT–also commonly referred to as a “self settled” or “(d)(4)(A)” Trust–may be established to protect current or future means-tested government benefits if an individual is about to receive a settlement, inheritance or other monies that will bring his countable assets to more than $2,000.
First party SNTs are most commonly required when an individual with disabilities has received a settlement from a personal injury action or an inheritance from a well-meaning person who did not understand that such a gift could disqualify the beneficiary from important government aid. Another common use for a first party SNT is for divorce alimony or property division, or for child support payments when dealing with a child who has a disability. Unless such funds are sheltered in a first party SNT or used to purchase exempt resources, the beneficiary would lose his benefits and be required to pay medical bills and many other expenses from the assets until those assets have been spent down to $2,000.
Trust vs Wills * Removal of a Trustee * Guardianship * Probate * Beneficiary Rights
Medicaid Asset Protection * Probate Litigation * Estate Litigation * Living Trusts
In Home Care * Supplemental Needs Trusts * Fraudulent Transfers
Additionally, the law requires that the SNT must be for the benefit of the individual with disabilities and that it be established by a parent, grandparent, legal guardian of the individual’s property, or the court. The trust agreement must provide a Medicaid payback provision requiring the state Medicaid agency to be reimbursed upon the death of the beneficiary. Finally, the SNT must be irrevocable.
A pooled SNT is also funded with assets that are owned by the trust beneficiary. At times the settlement or inheritance the person receives is small, and a first party SNT may not be the best solution, especially if there is no parent, grandparent or legal guardian available to establish the trust. If spending the funds for the individual’s care or needs or exempt resources is not a viable option, it may be more practical to place the litigation proceeds or inheritance in a pooled special needs trust.
Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the nonprofit organization manages a sub account for the beneficiary. A major difference between a first party SNT and a pooled trust is that an individual with disabilities can establish the pooled trust sub account himself. This is an attractive option for many beneficiaries who have no living parents, grandparents, or a legal guardian of their property.
Third Party Supplemental Needs Trusts
A third party SNT is funded with assets that are owned by parents, relatives or friends, but not assets owned by the trust beneficiary. Third party SNTs are an ideal estate planning vehicle for parents and other friends and relatives who want to leave an inheritance to an individual with disabilities. Parents frequently say that their greatest worry is how their child with disabilities will fare once they have passed away. Not only will a third party SNT shelter an intended inheritance, it can be used during the parents’ lifetimes for ongoing expenses that are not covered by government entitlements.
A significant attraction of the third party SNT is that, unlike a first party SNT, when the beneficiary dies, there is no Medicaid payback requirement. The person who created the third party SNT (often a parent) chooses and has complete control over selection of the trust remainder beneficiaries.
Thoughtful consideration should also be given to the designation of the trustee of any SNT. For example, in situations where the beneficiary’s parents have large estates, sometimes it is recommended that the parents not serve as trustees of an irrevocable SNT due to potential adverse tax consequences.
In choosing a trustee, consider the potential trustee’s ability to (a) be sensitive to the beneficiary’s disabilities, (b) actively monitor any services provided, (c) aggressively advocate for all entitlements, and (d) prudently invest SNT funds. Because of the trustee’s many roles, consider appointing a professional corporate trustee, either to serve alone or to serve jointly with a family member trustee.
Have you had your special needs trust reviewed lately?
Whether you are a trustee or a parent, it is a good idea to have the SNT reviewed periodically (ideally, annually) with your special needs estate planning attorney. The estate planning attorneys at the law offices of Rubinstein, Zeh and Associates can help you create a new estate plan or review your existing estate plan.
Some of the questions that should be reviewed include:
1. Have there been any changes in the laws that affect the SNT?
2. Do you need to make any changes to the trustees or trust advisors? Perhaps a successor trustee is ill or recently passed away and you need to designate a new successor trustee. Or perhaps you want to consider a corporate trustee if you have not previously designated one.
3. Do you understand the tax ramifications? It is important for you to understand how the income earned in the SNT is reported and on what type of income tax return. Questions you want to review with your attorney are whether your trust is a “grantor trust” for income tax purposes or whether it is considered a “qualified disability trust.” Also, what are the gift tax reporting implications, if any, when a third party makes a gift to the trust?
5. Are the assets designated to pour into the SNT as intended? Your last will and testament will not control the disposition of certain assets, such as annuities, insurance policies, and retirement plans, if you designate beneficiaries other than the SNT. Your attorney can help you check and update your beneficiary designations on these assets to make certain that they pass to the SNT at your death, if intended.
This overview and list of questions to be reviewed with a special needs planning attorney demonstrates that SNTs are very complex and require careful consideration and planning to ensure that the appropriate SNT has been set up for the beneficiary. By understanding the terms and requirements of the SNT chosen for the beneficiary, you will be in a better position to help protect the beneficiary’s benefits and quality of life.
To Preserve Governmental Benefits And Protect Assets…
A Supplemental Needs Trust (sometimes called a Special Needs Trust) is a specialized legal document designed to benefit an individual who has a disability. A Supplemental Needs Trust is most often a “stand alone” document, but it can form part of a Last Will and Testament. Supplemental Needs Trusts have been in use for many years.
A Supplemental Needs Trust enables a person under a physical or mental disability, or an individual with a chronic or acquired illness, to have, held in Trust for his or her benefit, an unlimited amount of assets. In a properly-drafted Supplemental Needs Trust, those assets are not considered countable assets for purposes of qualification for certain governmental benefits.
A Supplemental Needs Trust provides for supplemental and extra care over and above that which the government provides.
Supplemental Needs Trusts had been used for years based upon case law. In 1993, Congress created an exception under the amendments to the Omnibus Budget and Reconciliation Act (OBRA-93) which specifically authorized the use of Supplemental Needs Trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. The Social Security Operations Manual authorizes the use of Supplemental Needs Trusts to hold non-countable assets.
Each Supplemental Needs Trust is its own “entity” with its own Federal Identification Number (Employer Identification Number) issued by the Internal Revenue Service. The Trust is not registered under either the Grantor’s or the Beneficiary’s Social Security Numbers.
According to Congress a Supplemental Needs Trust must be irrevocable. A properly-drafted Trust will include provisions for Trust termination or dissolution under certain circumstances, and will include explicit directions for amendment when necessary.
WHAT CAN A SUPPLEMENTAL NEEDS TRUST BE USED FOR?
To Ensure That Your Disabled Family Member Has Every Opportunity For A Fulfilled And Happy Life . . .
According to the law, a Supplemental Needs Trust can be used for “supplemental and extra care over and above what the government provides.” A properly-drafted Supplemental Needs Trust will work on a “sliding scale”; that is, in the impossible event that the government provides for 100% of the disabled beneficiary’s needs the Trust will provide 0%. If there are no governmental benefits available, the Trust can provide 100%. Most people fall somewhere along the scale, and the Trust supplements governmental coverage. If a beneficiary falls into a Medicare “doughnut hole” for example, it becomes the Trust’s job to cover the shortfall.
It is important to remember that a Supplemental Needs Trust is a living legal document that is meant to not only maintain benefits eligibility, but also to bring enjoyment and new, positive experiences to the beneficiary.
MY FAMILY IS WEALTHY AND WE’RE NOT TOO CONCERNED ABOUT GOVERNMENTAL BENEFITS. WHY BOTHER CREATING A SUPPLEMENTAL NEEDS TRUST?
To Protect Your Disabled Family Member…
Other types of Spendthrift or Family Trusts aren’t appropriate for Special Needs persons because they don’t address the specific needs of the disabled beneficiary or his future lifestyle. Even in situations where a family may have significant resources to help a disabled family member a Supplemental Needs Trust should be established to address these issues.
Just as importantly, Trust funds are not subject to creditors or seizure. Therefore, if the disabled beneficiary should ever be sued in a personal injury or other type of lawsuit, the beneficiary is not a “deep pocket” because monies placed in the Trust are not subject to a judgment.
IF HAVING MONEY CAUSES PROBLEMS FOR MY DISABLED DAUGHTER, WHY CAN’T I JUST LEAVE THAT MONEY TO HER BROTHER SO THAT HE CAN LOOK AFTER HER?
Leaving Money To Others Can Create Serious Problems…
“Disinheritance” was commonly used before the use of Supplemental Needs Trusts was officially recognized by Congress. Disinheritance as a means of providing for a disabled or ill person puts the assets at risk. A non-disabled sibling holding assets for the benefit of a disabled sibling could be subject to such liabilities such as judgments from automobile accidents, a bankruptcy, or a divorce.
In such circumstances, the assets meant to benefit the disabled or chronically ill person could go to pay the judgment creditors or the estranged spouse of the non-disabled sibling. Using a Supplemental Needs Trust guarantees that the funds will be held only for the benefit of the person under the disability or chronic illness, and not for any other purpose whatsoever.
WHAT MUST A SUPPLEMENTAL NEEDS TRUST SAY?
Supplemental Needs Trusts Need Special Language…
At a bare minimum, the Trust should state that it is intended to provide “supplemental and extra care” over and above that which the government provides. The Trust must state that it is not intended to be a basic support Trust. It should not contain an estate tax provision called a “Crummey Clause.”
The Trust should also have language explaining the exception to the Omnibus Budget and Reconciliation Act (OBRA-93) provisions which authorize the creation of the Trust, and a copy of the relevant provisions from the United States Code (USC).
WHEN SHOULD I CREATE A SUPPLEMENTAL NEEDS TRUST?
A Supplemental Needs Trust Is A Valuable Estate Planning And Investment Tool…
A Supplemental Needs Trust can be established at any time before the beneficiary’s 65th birthday. It is very common to create a Supplemental Needs Trust early in a child’s life as a long term means for holding assets to benefit the disabled family member. This is particularly true of parents who wish to leave funds for a child’s benefit after the parents’ death. The Supplemental Needs Trust is the estate-planning tool of choice for those parents. As a part of Estate Planning, the costs of the creation of the Trust are tax deductible.
IS THERE AN OBLIGATION TO REPAY MEDICAID, OR OTHER STATE AND FEDERAL FUNDING SOURCES?
There May Be Repayment Obligations In Some Situations…
A properly drafted Trust will address the issue concerning paybacks to Medicaid or other such sources. The United States Congress mandates that repayment language must be included in all Supplemental Needs Trusts, whether repayment is required or not.
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