Setting Up a Special Needs Trust - Everything you need to know

If you’re lucky enough to have children, you already know that much of your mental inventory consists of thoughts concerning their wellbeing.

From the moment they are born, you’re already thinking about ways to ensure that your child or grandchild has a bright future. Questions such as: What will their interests be? What job will they have? Who will they marry? …and more might frequently cross your mind, even while they are still quite young.

While such questions are common concerns for most families, those with special needs children or grandchildren will need to consider even more than the basic parental questions. Because of the health-related and societal hurdles they will face, it’s crucial that you do your part to see that they have a safe, happy, and healthy future. With this in mind, we suggest the following to help provide a prosperous future for your special needs child or grandchild:

1)   Have a Special/Supplemental Needs Trust Prepared

If you have a special needs child or grandchild, one of the first steps to take is establishing a special or supplemental needs trust (SNT) for the beneficiary.

What is a special/supplemental needs trust?

A special needs trust is designed to set aside money and property specifically for the benefit of a beneficiary who may require public assistance, as well as medical or other care expenses resulting from a disability. This specification can be drafted as its own trust, or it can be added to an existing trust.

Since many government programs that provide disability aid have stringent guidelines surrounding how much money or property a handicapped person can own, and how much money they can receive on a regular basis, it is important to set up your trust in such a way that your special needs child or grandchild will still be eligible for government benefits. Even if your child or grandchild is not currently receiving government benefits, you should by no means assume that they will never receive them.

The end goal is to allow your loved one to capitalize on all available opportunities when considering their future. To accomplish this, it is crucial that any source of funding they receive – particularly from a trust – be carefully managed and overseen by an attorney who is familiar with the eligibility requirements for government benefits.

Source of Trust Assets

Special Needs Trusts can be broken into two different categories. They are:

1. Third-Party Special Needs Trusts

These trusts are created and funded by someone other than the beneficiary – for example, a parent, grandparent, or sibling. The trust shall be established either during the lifetime of the creator, or under the terms of the creator’s will. As enumerated in the following section, a Third-Party Special Needs Trust can provide for a special needs individual without limiting his or her eligibility for government benefits.

1. First-Party Special Needs Trusts.

These trusts are funded by a beneficiary’s own property – usually with an inheritance or the proceeds from a lawsuit.

Although the beneficiary’s assets will fund the trust, the regulations of a First-Party Special Needs Trusts require that the beneficiary’s parents, legal guardian, or an official court establish it. Another requirement states that the beneficiary must not be over the age of 65 at the time the trust is funded.

A First-Party Special Needs Trust is commonly referred to as an OBRA or (d)(4)(A) trust (Omnibus Budget Reconciliation Act of 1993; the full statutory cite is 42 U.S.C. section 1396p(d)(4)(A).)

Additional Trust funding conditions

Smaller Funds

If the trust fund in question is smaller, the beneficiary may instead opt to create a pooled Special Needs Trust (a (d)(4)(C) trust), which does not prohibit the beneficiary from being the grantor and does not impose an age limitation. In this case, the assets of many individuals are “pooled together” for investment purposes, with these funds then allocated to individual beneficiaries.

Payback Requirements

A thorough trust agreement will address the obligation to reimburse governmental programs, such as Medicaid, SSI, or the state equivalent. With Third-Party Special Needs Trusts specifically, the remainder beneficiaries will receive the entire balance of the trust, because its assets are not subject to Medicaid payback provisions upon the death of the beneficiary.

Alternatively, First-Party Special Needs Trusts are subject to payback provisions, allowing for Medicaid to provide reimbursement from the property remaining in the trust upon the death of the beneficiary. Should a balance remain after the Medicaid payback, this outstanding amount is then distributed to the designated remainder beneficiaries. If the First-Party Special Needs Trust is a pooled trust, any remaining funds may be eligible for donation to the pooled trust in lieu of Medicaid payback, which will then be used for other beneficiaries of the trust.

To clarify, let’s briefly take a closer look at 42 USCA 1396P(d)(4)(C), which states that qualifying pooled Special Needs Trusts shall include a trust containing the assets of a disabled individual (as defined in section 1382c(a)(3) of this title) that meets the following conditions:

• (i) The trust is created and managed by a non-profit organization
• (ii) A separate account is maintained for each of the trust’s beneficiaries (but for investment and management of funds, the trust may pool these accounts)
• (iii) Accounts in the trust are established solely for the benefit of a disabled individual by a parent, grandparent, legal guardian, or the court
• (iv) Should any funds remain in the beneficiary’s account upon their death which are not retained by the trust, the trust would pay the State an amount equal to the total medical assistance paid on the beneficiary’s behalf.

Establishing Intent in the Trust Document

To avoid disqualification of a beneficiary for government support, federal and state laws strongly suggest that the wording of a trust document be very clear that all assets will supplement – not supplant or diminish – any government benefits to which the beneficiary is entitled. The trust document should clearly state that the Special Needs Trust is not intended to be a basic support trust.

The Special Needs Trust may include a statement of intent to instruct the trustee or court regarding how the money and/or property should be used. Even if you believe your intentions to be self-evident, including a statement of intent in the SNT can act as a safety net in the event of legal changes which could render the beneficiary ineligible for government benefits.

Should you choose to include a statement of intent in your Special Needs Trust, it is easier to change the trust to ensure that your original objective is observed in the event of unforeseen changes, especially after you have passed away.

Essential Items in Special Needs Trusts

The following items are essential characteristics of a Special Needs Trust:

1.  It must be irrevocable
2.  It must be valid under federal and state law
3.  It must negate a determination that trust assets are “available resources” of the beneficiary for purposes of Supplemental Security Income (SSI), Medicaid, or an equivalent state program
4.  The beneficiary must be disabled within the meaning of the rules governing Social Security Disability. Many state programs also impose this requirement in order for a trust to qualify as a (d)(4)(A) or (d)(4)(C) trust.

What Can Benefit from the Trust?

Some examples of trust distributions for the beneficiary that should not affect their government benefits might include:

• Reasonable compensation of the trustee and allied professionals advising the trustee (e.g., investment manager, attorney, fiduciary accountant)
• Reasonable compensation of care providers – including family members – where appropriate (Medicaid is often discriminating of paid family or friends of beneficiaries due to frequent abuse)
• Medical services and equipment not covered by government programs
• Domestic and other personal care services (housekeeper, grooming, meal preparation)
• Associated household costs other than food, mortgage or rent, real property taxes, heating fuel, gas, electricity, water, sewer and garbage removal
• Pre-paid funeral and burial arrangements (however, if the beneficiary dies before arrangements have been pre-paid, no payments are permitted from the Special Needs Trust until after Medicaid payback is fully completed)
• Computer or augmentative communications devices, including internet service
• Television or other electronic equipment
• Apparel, including maintenance and repair
• One vehicle used for transporting the beneficiary (not including a purely recreational vehicle)
• Membership in recreational clubs, cultural institutions, etc.
• Professional services, including but not limited to attorneys, accountants, claims processors, advocates, and coaches
• Academic or recreational courses
• Home decor, furniture, furnishings, appliances
• Dry cleaning, laundry services, and related supplies
• Fitness equipment and club membership
• Auto maintenance and supplies
• Home security alarm and monitoring service
• Yard service and maintenance
• Home, auto, and liability insurance
• Linens, towels, and bedding
• Personal care items and supplies
• Music lessons, including the cost of instruments
• Non-food groceries
• Educational needs and supplies
• Over-the-counter medications
• Pets, service animal and supplies, and veterinary services
• Sporting goods and equipment
• Stationery and stamps
• Telephone service and equipment
• Therapies not covered by benefits programs
• Tickets to cultural or sporting events
• Transportation costs (bus, subway, paid driver)
• Vacation for the beneficiary plus one attendant
• Catch-all: “Such uses and purposes as the trustee deems appropriate under all circumstances” for the sole benefit of the beneficiary.

Choosing a Trustee 

It is important to choose the trustee of a Special Needs Trust wisely. Some characteristics that will prove beneficial for such a role include:

1. Experience in managing assets, especially those pursuant to investor rules
   2. Knowledge to exercise the trust’s discretion under the agreement terms to make payments on behalf of the beneficiary for supplemental, non-support disbursements
   3. The ability to avoid any conflict of interest that might occur if a friend or family member were to act as trustee
   4. Skills to maintain clear and accurate financial records which, when necessary, can be used to prepare annual court accountings
   5. Perhaps most importantly: the genuine ability to take a friendly and caring interest in the beneficiary.

Note that in the event of a pooled trust, a non-profit organization with trust powers must act as the trustee.

Additional care – appointing a care manager

A Special Needs Trust allows you to appoint a care manager or an advisory committee rather than a trustee. Where a trustee would manage the money and property outlined in a trust (and make distributions), the care manager of an SNT acts as your child or grandchild’s advocate.

A care manager may only need to check on your beneficiary periodically, or they may be responsible for their day-to-day care; this all depends upon the assistance that your child or grandchild requires. For those who need extra care, the care manager may also serve as part of an advisory committee made up of multiple friends, family members, and/or professionals.

As an advocate, the care manager or advisory committee can work with the trustee to ensure the beneficiary’s needs are met, and decide on the best way to use funds.

2)   Write Down Your Instructions

Writing a letter or memorandum of intent to accompany a Special Needs Trust can serve as an excellent way to instruct your trustee how they should proceed after your death. Such instructions can give your trustee insight into your true intentions. Bear in mind that this document is not legally binding.

In a memorandum of intent, you can provide instructions that clarify how your funds should be used (assuming that are permissible by government regulations), milestones you would like for the beneficiary to achieve, and the standard of living you envision for the beneficiary.

3)   Consider Life Insurance to Provide the Necessary Funds

Supporting a special needs child or grandchild isn’t cheap. While you are working or have a steady stream of income, you can allocate money as you see fit. However, not everyone has the financial means to continue covering expenses for their special needs loved ones after they have passed away.

By purchasing life insurance and naming the SNT as beneficiary, you can guarantee that there will be sufficient funds at the trustee’s disposal to care for your child or grandchild. Life insurance can be an attractive option because it is paid out as a lump sum, and does not have the same income tax liabilities as retirement accounts.

4)   Review Your Retirement Accounts

When the SECURE Act was passed, most beneficiaries lost the ability to stretch distributions from an inherited IRA over the course of their lives. However, Congress created a new class of beneficiaries called “eligible designated beneficiaries,” which includes disabled beneficiaries. These beneficiaries are able to continue receiving distributions over their life expectancies, reducing the amount of income tax due on their inherited funds.

Congress also passed additional rules allowing the disabled beneficiary’s life expectancy to be used for certain types of trusts. It is crucial to determine how this money can be distributed after your death to maximize it for your beneficiaries, especially if you have a large retirement account.

Give Us a Call

Ensuring that your special needs child or grandchild is cared for after you are gone is understandably one of your top priorities. Conveniently, our priority is to assist you in crafting an airtight plan to ensure continued support and prosperity for your loved ones. Call us today to schedule your appointment!