Special Needs--Special Trusts: What You Do Not Know Can Hurt Your Clients and You!

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Bernard A. Krooks of Littman Krooks LLP provided the attendees of the Heckerling Institute on Estate Planning an overview of special needs planning and special needs trusts (“SNTs”). One of the primary goals of special needs planning is to allow an individual with a disability to qualify for government benefits, while maintaining a source of additional funds to pay for expenses not covered by such benefits. This goal sets a certain standard for special needs planners and advisors who should have a working knowledge of not only tax law, but trusts and estates, public benefits and various state laws.

The primary government benefit available to an individual with a disability is Medicaid. Medicaid is a jointly funded, federal and state program that will generally pay for medical expenses, including long-term care. Another benefit available for an individual with a disability is Supplemental Security Income (SSI). SSI is not social security; it is a federal program which pays a monthly stipend to the individuals that qualify. In addition to food and shelter, SSI may also cover expenses related to the cost of group homes or other residences. Both the Medicaid and SSI programs are “means-based” which means that to qualify, an individual must not exceed certain income levels and asset requirements. This is where SNTs become relevant.

To achieve the goal of qualifying for government benefits, there are 3 entities that can be established. Two entities are SNTs; first-party SNTs and third-party SNTs, with the principal difference being the source of funding. First-party SNTs are funded by assets owned by the individual with a disability, whereas third-party SNTs are funded by assets owned by individuals other than the individual with a disability. The third entity is a pooled trust. Pooled trusts are similar to first-party SNTs, as they are funded with assets owned by an individual with a disability, with the difference being that pooled funds are managed/operated by a not-for-profit. Each of the above entities requires certain provisions to be met in order for the individual to qualify for government benefits, otherwise Medicaid concerns become a reality.

The ABLE (Achieving a Better Life Experience) Act , signed into law during December 2014, established Section 529A of the IRC. These accounts are modelled after Section 529 plans, in that they grow income tax-free; however, they are structured in order for individuals to fund a separate account in the name of an individual with a disability (the beneficiary). In addition, if certain requirements are satisfied, these accounts will not disqualify the individual beneficiary from qualifying for government benefits.

There have been a number of common considerations and errors that have generated Medicaid concern or, even further, disqualified an individual with a disability from receiving government benefits, such as:

1. Not providing flexibility in drafting
2. Not creating third-party SNTs for individuals age 65 or over
3. Creating a first-party SNT for an individual age 65 or over
4. Requiring mandatory distributions
5. Spending assets in a-third party SNT prior to a first-party SNT

….and these are to name just a few.

The bottom line, as suggested by Mr. Krooks, is to work with the appropriate service providers whose niche is in the area of special needs planning. “What you don’t know can hurt your clients and you.”