What Makes a Special Needs Trust So Special, and When Should One Be Used?

Presented by Craig C. Reaves, Reaves Law Firm, PC

Our families and/or our clients have individuals that may benefit now or in the future from public assistance programs.  This presentation summarized the basic concepts needed to understand public assistance programs and certain trusts and provisions that will be able to provide assets and distributions for individuals that are or may be eligible for means-tested public assistance programs without jeopardizing their eligibility for benefits.

There are three basic concepts one needs to understand related to special needs trusts (known under various names):

1. Different types of public assistance – those that are means-tested and those that are not.
2. Difference between self-settled trusts and third party-settled trusts.
3. Different types of distribution clauses and how they impact a trust beneficiary’s eligibility for means-tested assistance.

Primary public assistance programs require, in addition to citizenship status, that the person must be sufficiently old, disabled or blind.  In addition, means-tested programs require the person have sufficiently low income and few assets (known as resources) available to the person.

Two of these means-tested public assistance programs are Supplemental Security Income (“SSI”) and Medicaid.  SSI is meant to provide for basic food and shelter.  While Medicaid is to provide for health care and long-term care, it also opens the gateway towards other programs.  To be eligible, the individual’s monthly income must be no more than the monthly SSI benefits ($783 for 2020) and no more than $2,000 in accountable resources.

Transfer penalties apply if an eligible individual gives away or even disclaims monthly income or available resources which will disqualify them from receiving means-tested benefits for a period of time.

Means-tested public assistance programs require special terms in trust documents in order to provide additional resources for the beneficiary without jeopardizing the beneficiary’s eligibility for benefits.

A self-settled trust is a trust which holds any assets formerly owned by the person who is the beneficiary of the trust and a third party-settled trust is a trust which holds assets transferred from someone other than the beneficiary or spouse.

Examples of when a self-settled trust is used include (a) a person received a personal injury award or an inheritance; (b) a person who has assets and is injured or sustained a debilitating medical event or (c) a minor child with a disability who reached the age of 18.

A third-party settled trust is when someone other than the beneficiary or their spouse wants to create a trust or leave money or other assets for the benefit of a person who qualifies or may qualify in the future for means-tested public assistance.

There are four traditional distribution standards of trusts:

1. Support distribution standard
2. Discretionary support distribution standard
3. Purely or totally discretionary distribution standard
4. Special needs distribution standard

A self-settled trust must comply with the provisions of Omnibus Budget Reconciliation Act of 1993 (OBRA 93) which substantially limited the use of self-settled trusts for Medicaid eligibility programs.  There are only two types of self-settled trusts authorized by 42 U.S.C. 1396p (d)(4)(A) and 42 U.S.C. 1396p (d)(4)(C) which will not disqualify the beneficiary from Medicaid and SSI benefits.

A d4C trust is a pooled special needs trust created by a non-profit organization.  We will concentrate on the d4A trust.

For a d4A, trust the beneficiary must be sufficiently disabled and under the age of 65 at the time the trust is established and whenever assets are transferred in.  The trust must be irrevocable and for the sole benefit of the beneficiary, and can only be established by the beneficiary, beneficiary’s agent under a durable power of attorney, beneficiary’s parent or guardian, or a court.  The trust must repay Medicaid when the beneficiary dies for Medicaid assistance provided. If these requirements are met the trust may hold assets and distribute for the benefit of the beneficiary to supplement the beneficiary’s Medicaid and SSI without disqualifying the beneficiary from the public assistance.

If someone other than the beneficiary or the beneficiary’s spouse wants to create a trust for an eligible individual, a third party-settled special needs trust should be used.  This trust does not have to comply with the provisions of OBRA ‘93, has no age restrictions, is not required to repay Medicaid and does not have to be for the sole benefit of the eligible person but care must be taken in drafting the distribution provisions as to not disqualify the individual from receiving means-tested public program assistance.

A spouse can create a testamentary special needs trust by will which can also be used without disqualifying the individual for benefits.

The third party-settled special needs trust must be carefully drafted as to not disqualify the beneficiary from eligibility of the means-tested benefits.  The trust should not impose a duty on the trustee to support the beneficiary, should not use a mandatory support distribution standards and should be careful with using discretionary support distribution standards.  A purely or totally discretionary distribution standard should work in most states.  The trust should not give the beneficiary the right to access trust principal and should clearly express the settlor’s intent to supplement public benefits.

To summarize the key takeaway points of this presentation:

1. Know when to use a self-settled trust and the requirements that need to be met
2. When using a third party-settled trust do not impose a duty to the trustee to support the beneficiary. Instead, use pure discretionary distribution provisions where the beneficiary cannot compel distributions and therefore the assets are not countable. This makes it clear that the intent is to supplement their care.
3. If a spouse wants to create a special needs trust it must be a testamentary trust through a “will” and not a revocable trust.

To read more Heckerling content, please see below:

• The Life-Changing Magic of Grantor Trusts
• Why Do I Cringe Every Time I See an S Corporation in My Client’s Estate Plan?
• You Mean I Can’t Bribe the Coach? Modern Ethics Issues You Didn’t See Coming
• What Makes a Special Needs Trust So Special, and When Should One Be Used?
• Cures for a Cosmopolitan Hangover: What We’re Doing for International Clients Following Tax Reform
• Peripatetic Clients: No, It’s Not an Illness but They Need Your Constant Care
• Planning for Retirement Benefits After the SECURE Act
• Creative Planning Techniques with Grantor and Non-Grantor Trusts
• A Sequel Much Worse Than the Original:  Planning for GST Tax on Nonexempt Trusts