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Elder Law Q&A: What Is A Special Needs Trust?

Elder Law Q&A: What Is A Special Needs Trust?
Question: What is a Special Needs Trust?

Answer: Many public benefits are means tested, which means that the public program limits the amount of income and/or assets that an individual can have in order to qualify for the benefit. Unfortunately, individuals with disabilities often depend on programs like Supplemental Security Income (SSI), Medicaid, food stamps, and public housing. Nevertheless, these programs are very basic and do not provide for items not provided by the particular program, which may improve their quality of life.
Consequently, individuals needing Medicaid long term care benefits often need Special Needs Trusts. If drafted properly, the contents of a special needs trust are not counted by Medicaid and do not disqualify eligibility for public benefits.
Generally speaking, there are two basic types of Special Needs Trusts, First Party and Third Party, depending on whose money is used to fund the trust. First party trusts are funded with assets owned by the beneficiary while third party trusts are funded with someone’s else’s money, such as a parent, grandparent, or spouse.
First party trusts are governed by federal law. They are self-settled, or funded with the beneficiary’s own money. There are two basic variations within the class of First Party Trusts: (d)(4)(A) and (d)(4)(C).
Until the Special Needs Trust Fairness Act became law late in 2016 , (d)(4)(A) trusts were established by a parent, a grandparent, a court appointed guardian, or the court. Mentally competent disabled persons could not establish their own (d)(4)(A) Trust. The Special Needs Trust Fairness Act now allows competent persons with disabilities to establish their own trust. These trusts may be created (and funded) only for individuals who meet the government’s definition of “disabled” and are under sixty-five years of age when the special needs trust is established (and funded).
(d)(4)(C) trusts are often called “Pooled Trusts” They contain the funds of the an individual who is “disabled” as defined by federal law and are part of a master trust agreement, managed by a non-profit organization, with multiple beneficiaries. The non-profit maintains a separate account for each beneficiary, but pool funds for investment and management purposes. The state or the Pooled Trust Fund itself must be named as the primary beneficiary to receive all amounts remaining in the trust upon the death of the disabled individual, up to an amount equal to the total medical assistance paid on behalf of the individual by the public benefit program. Typically, there is no minimum amount required to join a pooled trust.
Third Party Trusts are not governed by federal law and contain the funds of someone other than the disabled person. Whether the assets in a third part trusts are countable or disqualifying assets for determining eligibility for public benefits is determined by comparing POMS (Social Security Program Operations Manual) guidelines, which stem from the Social Security Act, Titles XVI and XVII., with the language of the third party trust itself. If the beneficiary can obtain and use trust assets for his or her support and maintenance or if the beneficiary can revoke or terminate the trust and then use the assets for food or shelter, whether the beneficiary actually does so or not, then the trust assets are countable when determining eligibility for public benefits. Also, if the beneficiary is entitled to mandatory periodic payments from the trust, the present value of those potential payments may be a countable resource.
Spousal Special Needs Trusts must be testamentary, or created in the Last Will and Testament of one spouse, for the benefit of the other spouse; otherwise, federal statutes will count the trust assets as a transfer of assets that may impose a penalty on the beneficiary. However, unlike first party trusts, the state must does not have to be named as the primary beneficiary, and upon the death of the beneficiary, trust assets may be distributed to other individuals.
Special needs planning can be very complex, and an understanding of the laws involved is required to properly draft a special needs trust. If you would like more information or if we can help you or a loved one establish a special needs trust, please contact Smith Law, PLLC at (850) 641-8900.
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