Special Needs Trusts Pros, Cons, and FAQs
Many people meet with me about the pros and cons of setting up a Special Needs Trust. It’s my honor when they confide about the needs of a loved one, especially a child and their heartfelt desire to protect them now and in the future, especially when they pass. Here are some general answers to the most common questions I’m asked by clients when evaluating the benefits of creating a Special Needs Trust.
1. First Off, What is a Special Needs Trust?
A Special needs trust (also known as “supplemental needs” trust) allows a person with a disability to receive gifts, lawsuit settlements, or other funds without losing his or her eligibility for certain government benefit programs. These trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining eligibility for government benefit programs.
As their name implies, a special needs trust is not designed to provide basic support, but instead to pay for items and services that will not be paid for by public or private benefit programs. These trusts typically pay for things like leisure activities, hobbies, recreation, counseling, camp, and other items beyond the simple necessities of life. A trustee, however, may use trust funds for other needs if the trustee decides that doing so is in the beneficiary’s best interest. Special needs may include some medical and dental expenses, necessary or desirable equipment and vehicles (such as an accessible van), training or specialized education, additional insurance, transportation, and modifications to a home. If the trust is sufficiently funded, the trustee may purchase electronic equipment and appliances, computers, vacations, movies, may pay a companion, and make other financial decisions that improve self-esteem. These are called quality-of-life enhancements.
Often, special needs trusts are created by a parent or other family member for a child with a disability (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up alone with a will as a way for an individual to leave assets to a relative with a disability. In addition, the individual with the disability may create a trust himself or herself, depending on the program for which he or she seeks benefits. These “self-settled” trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice case and later receive the proceeds of a personal injury award or settlement.
2. What can SNT funds be used for?
SNT funds can be used for the special needs of the trust beneficiary. The funds may only be used for the sole benefit of the trust beneficiary.
3. What regulations and laws apply to SNTs?
The Federal statute is at 42 U.S.C. 1396p(d)(4)(A). State statutes are at N.J.S.A. 3B:11-36 and N.J.S.A. 3B:11-37. State regulations are found at N.J.A.C. 10:71-4.11(g)1. These regulations set forth language that must be included in a SNT for New Jersey Medicaid purposes. These regulations can be found on the SNT website of the Division of Medical Assistance and Health Services (DMAHS).
4. What are some of the special requirements and conditions a SNT must meet?
- First off, the trust is funded with the assets and resources of a disabled individual. This can include gifts made to the individual. All deposits to the trust must occur prior to the individual reaching age 65. After age 65, it’s too late.
- The trust beneficiary must be disabled as required under 42 U.S.C. 1382c(a)(3).
- The trust must be irrevocable, meaning it cannot be revoked by the trust creator.
- Only the disabled person can be the sole beneficiary of the trust, no one else.
- Upon death of the trust beneficiary, the New Jersey Medicaid program must be reimbursed up to the total amount of Medicaid benefits paid on behalf of the trust beneficiary during his/her lifetime.
5. Who can establish a SNT?
A parent, grandparent, legal guardian, or a court, and now following a change in Federal law, the disabled person himself or herself can establish a SNT.
6. How are SNTs monitored?
The NJ Division of Medicaid Assistance monitors the SNT on an ongoing basis by reviewing the trust and its accountings at the time of application and redetermination. DMAHS also monitors SNTs on an ongoing basis through review of the trust, review of annual accountings, and review of proposed expenditures required to be reported to DMAHS in advance of the expenditure.
7. Can a special needs trust buy a house?
Yes. A Special Needs Trust can buy a house and there are often good reasons to do so. However, there are some strict rules under SSI law and New Jersey Medicaid regulations that must be considered before making that decision.
8. Can a special needs trust buy an automobile or van?
Yes. A Special Needs Trust can buy an automobile or a van. A SNT can also pay for modifications to a vehicle, or for insurance and maintenance.
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9. Can a trust pay for vacations?
Yes. A Special Needs Trust can pay for vacations, but there are guidelines about using trust funds to pay for a vacation that includes other family members.
10. Can a special needs trust pay parents for the care of a child?
In New Jersey it is very difficult for a Special Needs Trust to pay parents for the care of a child. This is because the assets of a Special Needs Trust under New Jersey Medicaid regulations cannot be used to discharge a parental obligation of support or to supercede Medicaid programs. If the child is over 18, then the parent may be paid for the care of an adult child through PPP or another government benefit program. Recent changes in social security regulations have made payments to parents for care much more rigorous and challenging.
11. Who gets the assets left in the special needs trust on the death of the beneficiary?
Under Federal law for one type of SNT, the State Medicaid Agency must be paid back for any benefits paid to the beneficiary of the Special Needs Trust. If there are assets remaining after repayment to Medicaid and DDD, they go to the family heirs. Not so with a Supplemental Needs Trust. There is a no pay back requirement. The trust creator can direct all trust funds remaining to whatever beneficiaries he or she designates. Go back to the home page where I discuss this subject in more depth.
12. Does a person on SSD need a special needs trust?
SSD carries with it Medicare. Neither SSD nor Medicare is means tested. However, there are often other reasons why a person on SSD might need a Special Needs Trust. For example, if the person collects SSD based on a parent’s work history (a “DAC”) and receives DDD or Medicaid benefits (such as residency placement), a third-party Special Needs Trust should be considered. The answer is therefore more difficult and requires more discussion and analysis.
13. Can a special needs trust distribute cash to the beneficiary?
Any cash distributed by a Special Needs Trust to a beneficiary will reduce his or her SSI payment dollar for dollar. If the SSI payment is eliminated, Medicaid will be lost. It is not good practice for a trustee of a Special Needs Trust to distribute cash if the beneficiary receives SSI. Cash payments to SSI beneficiaries should never be done. It’s a landmine that can blow up public benefit eligibility.
14. Are Special Needs Trusts subject to taxes?
There may be income, gift and estate tax considerations in establishing and administering a Special Needs Trust. These must all be carefully considered.
15. Who is a good choice to serve as a trustee?
That’s a simple question but requires a complex answer. Sometimes it’s best not to have a family member serve as a sole trustee of a Special Needs Trust. The combination of a family member and a professional trustee is often a good arrangement. I can be talked into just selecting a trusted family member especially if they are age appropriate and trustworthy. Picking the right trustee is really important.
16. How can I protect a special needs trust from those who prey on vulnerable persons?
Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts, you decide who has access to the information about your children’s inheritance. This protects your child and other family members, who may be serving as trustees, from predators. There are several legal safeguards built into a Special Needs Trust to add further protection for a loved one.
17. Can others contribute to my child’s special needs trust?
Yes, they can. One key benefit of creating a trust now is that your extended family and friends can make gifts to the trust or include the trust in their estate planning. We will give you a letter to share with family explaining what you have done. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low. In these cases, the special needs trust should be irrevocable rather than revocable.
18. Why is it important to have an attorney who is knowledgeable in special needs trusts?
It is important that a special needs trust not be unnecessarily rigid and generic. An attorney with knowledge of SNTs and Medicaid rules can help protect a beneficiary. An attorney without special needs experience may not know how to customize the trust to the particular child’s needs, and the child may not receive the benefits that the parent provided when they were alive.
Another mistake attorneys without special needs experience make time and time again is putting a “pay-back” provision into the trust rather than allowing the remainder of the trust to go to other family beneficiaries upon the special needs child’s death. While “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your family hundreds of thousands of dollars, or more.
19. Why not just disinherit a child with a disability?
Many people with disabilities rely on SSI, Medicaid or other government benefits to provide food and shelter. You may have been advised to disinherit your child with a disability – the child who needs your help most – to protect that child’s access to government benefits. But these benefits rarely provide more than subsistence. And this “solution” does not allow you to help your child after you are incapacitated or gone.
When your child requires or is likely to require access to governmental benefit programs to meet their basic needs, you should consider establishing a special needs trust.
20. How do I choose a trustee?
Choosing a trustee is one of the most important and difficult issues in special needs trusts. The trustee must have the necessary expertise to manage the trust, including making proper investments, paying bills, keeping accounts, and preparing tax returns. A professional trustee will have these skills but may be unfamiliar with the beneficiary and his unique needs. For those who may be uncomfortable with the idea of an outsider managing a loved one’s affairs, it is possible to simultaneously appoint both a professional trustee and a family member as co-trustees. It’s also possible to choose a trust “protector,” who has the power to review accounts and to hire and fire trustees, and a trust “advisor,” who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may be too expensive. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical and cares about your family member.
21. Can I create a special needs trust and still be eligible for Medicaid and SSI?
Each public benefits program has restrictions that the special needs trust must comply with in order not to jeopardize the beneficiary’s continued eligibility for government benefit programs. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two “safe harbors” permitting the creation of special needs trusts with a beneficiary’s own money if the trust meets certain requirements.
The first of these is called a “payback” or “(d)(4)(A)” trust, referring to the authorizing statute. “Payback” trusts are created with the assets of an individual under age 65 with a disability and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary’s death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary’s behalf, then DDD (if applicable).
Medicaid and SSI law also permit “(d)(4)(C)” or “pooled trusts.” Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual special needs trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary his- or herself. In addition, at the beneficiary’s death the state may not have to be repaid for its Medicaid expenses on his or her behalf if the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust may be an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.
22. Can Life Insurance be used to fund a special needs trust?
A parent with a child with a disability should consider buying life insurance to help fund the special needs trust set up for the child upon death. What may look like a substantial sum to leave in trust today may run out quickly. The more resources available, the better the protection that can be provided the child. And if both parents are alive, the cost of “second-to-die” insurance — payable only when the second of the two parents passes away — can be surprisingly low.
23. Will trust income affect SSI eligibility?
Income paid from a special needs trust to a beneficiary would reduce SSI benefits by one dollar for every dollar paid to him or her directly. In addition, payments by the trust to the beneficiary for food or housing are considered “in kind” income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such “in kind” income. Some attorneys draft the trusts to limit the trustee’s discretion to make such payments. Others do not limit the trustee’s discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future. The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.
24. Why not pass the money on to another child if they promise to take care of my disabled child/grandchild?
Some parents choose to avoid the complication of a trust by leaving their estates to one or more of their healthy children, relying on them to use the funds for the benefit of their sibling with a disability. This is not a solution that will protect your child because it creates great risks to the security of the funds transferred.
- What if your child with the money divorces? His or her spouse may be entitled to half of it and will likely not care for your child with a disability.
- What if your child with the money dies or becomes incapacitated while your child with a disability is still living? Will his or her heirs care for your child as thoughtfully and completely?
- What if your child with the money loses a lawsuit and must pay a large judgment or has other significant creditor problems? The court will certainly require your child to turn that money over to the creditor.
In addition, this can create a burden for the child or children holding these “morally obligated” funds. Can he or she spend them on herself and her family? If so, how much is belongs to each? This approach can also create rifts among the other siblings, as some may spend the funds for their own needs and some for their brother or sister.
The share of your estate going to your child with special needs should be placed in a trust for his benefit.
25. How can I leave money to a child with special needs?
In almost all cases where a parent will leave funds at death to a child with a disability, this should be done in the form of a trust. Trusts set up for the benefit of a child with a disability generally are called “supplemental” or “special” needs trusts.
Money should not go outright to the child, both because he or she may not be able to manage it properly and because receiving the funds directly may cause the child to lose means tested government benefits, such as Supplemental Security Income (SSI) and Medicaid. Often, these programs also serve as the entry point for receiving vital community support services such as DDD. In the case of SSI, at the end of 1999 Congress enacted laws making it much more difficult to create a trust for an individual with a disability after she has received an inheritance, making it even more important that parents create the trust as part of their estate plan.
26. What is a plan of care?
Where is your son, daughter or sibling going to live when he can no longer live with you? Will he move in with a sibling? Or into a group home? Who will make the decision? Who will monitor the care he or she receives? It’s never too soon to begin answering these questions and making sure that the living and support arrangements are in place. If you have questions about residency placements, call Fredrick P. Niemann, Esq. toll-free at 855-376-5291.
In some cases, it may be appropriate for the child move to a residential placement or supervised apartment while his parents can still help with the process. In many parts of the country, non-profit organizations and private consultants can help plan, research available options, and assist in the move. In NJ, residential placements are provided by DDD.
It will help everyone involved if the parents create a written statement of their wishes for their child’s care. They know him or her better than anyone else. They can explain what helps, what hurts, what scares their child (who, of course, is an adult), and what reassures him or her. When the parents are gone, their knowledge will go with them unless they pass it on. We call this a Letter of Intent, and instruct our trustees to be guided by it.
This plan of care belongs in your “Memorandum of Intent,” or “Letter of Intent”. It should also include all the basic information anyone taking over from the parents should have, such as the name and contact information for the child’s medical practitioners and information on any medications he or she takes. This document should be updated on at least an annual basis.
27. When does it make sense to set up a special needs trust?
If you have a child with a disability, such that your child is unable to live independently, the Special Needs Trust should be part of your estate plan.
28. Is there a limit to the number of dollars that can be in this trust for the benefit of a disabled person?
No. We have created trusts that will ultimately hold as little as a few thousand dollars and we have created trusts that hold significantly more money.
29. Does the special needs trust for my disabled child or family member replace my will or other trusts I’ve set up?
No. Your existing trust will continue to hold your assets as long as you live. In most cases, the child’s inheritance will be distributed from either your will or an existing trust to the Special Needs Trust at the time of your death.
30. Will money go into the special needs trust for my child while I am living?
It can if you want to set it up that way. Typically, the trust is funded or receives money only upon your death, but some people prefer to set up and fund SNTs while alive, especially grandparents or parents of adult disabled persons. You might also decide whether to gift or transfer money into the trust while you are living. Doing so raises several tax issues about which you must obtain appropriate advice.
31. What can the money in the trust be used for?
Generally speaking, money in the trust can be used to pay for items and services that are not provided to the person by means-tested government benefit programs. For example, money in the trust can buy the beneficiary a television or pay someone to be the individual’s companion while on a trip.
32. Why should I bother with the trust? Why not leave everything to my child’s neurotypical brother and let his brother take care of the money?
It is important to have dedicated funds irrevocably devoted to the person with the disability. His brother, his sister or other family members, however well meaning, could face a divorce or be sued or die before his sibling with a disability. In any of these circumstances, the money could be lost and become unavailable.
33. Who should be the trustee of a special needs trust?
The trustee should be someone who is very responsible and who will be devoted to the beneficiary. This is often a relative, although it can be a professional fiduciary or “professional trustee” if no family member is available. This is a very complicated question that you must discuss with your attorney who understands these types of trusts.
34. What happens with money remaining in the trust when the beneficiary dies?
If you create a trust for the benefit of your child, money remaining in the trust goes to the beneficiaries you select. It is up to you. Alternatively, remaining assets can go to your favorite charity, surviving grandchildren, etc.
35. Does this mean that the state will not be paid back the money for the child’s medical care?
That is correct. When parents establish a third-party trust for the benefit of a child with a disability, which is most typical, the state does not get its money back.
36. If a person with a disability inherits money, can a special needs trust help?
Yes. In most circumstances, an individual who is eligible for means-tested government benefits can shift inherited assets – or other assets he receives – into such a trust. This usually takes several months. Eligibility for government benefit programs will then be restored. The trust will typically be created by his parents or through the Courts. He may establish it himself, under certain circumstances. If this is done, the state may have the right to reimbursement for any benefits that it has paid to date.
37. Can a person who receives federal disability benefits and Medicaid own a car?
Yes. If you receive Social Security Disability Insurance (SSDI), there is no limit to how many cars you can own. However, if you receive Medicaid or Supplemental Security Income (SSI), you can own only one car
38. Can funds in a SNT be transferred to an ABLE Account?
The POMS has made it clear that funds transferred from a special needs trust (SNT) into an ABLE account established by the trust beneficiary or individual with signing authority under the ABLE Act are not counted as income to the trust beneficiary.
Of significance is that funds from an ABLE account can be used to pay for shelter expenses such as mortgage or rent, homeowner’s insurance, taxes, heat, electricity, water, sewer and garbage pick-up without resulting in a reduction of monthly Supplemental Security Income (SSI). To avoid any impact to the beneficiary’s SSI benefits, funds from the ABLE. ,account used to pay for shelter expenses must be spent within the same calendar month that funds are withdrawn from the account.
39. Do distributions from a SNT have to exclusively benefit the beneficiary?
The general rule for a trust established for the sole benefit of an individual remains the same. The key change in this provision is that when the trust makes a payment to a third party for goods or services, the goods or services must be for the primary benefit of the trust beneficiary. You should not interpret sole benefit as strictly as to prevent collateral benefit to anyone else. For example, if the trust buys a television, this does not mean that no one else can watch it. Caution: It is important to reasonably interpret this change when making disbursement decisions.
40. Who are eligible service providers to a disabled SNT beneficiary?
A third-party service provider can be a family member, a non-family member or a professional entity and the trust can pay for needed services provided. Medical training or certification for family members who receive payment to provide care is not required.
Payment for companion services, such as taking care of a beneficiary who cannot be left alone, driving the beneficiary to the store, or assisting with grocery shopping, can be a valid expense. When reasonable, the trust companion, such as admission to an event that the beneficiary can only attend with assistance.
41. How about vacations? Who can go on trips with an SNT?
The guidelines allow payment of third-party travel expenses to accompany the trust beneficiary to provide services or assistance that is necessary due to the beneficiary’s medical condition, disability or age.
It is not necessary to request documentation from a medical professional that a third-party companion/caregiver is required for the beneficiary to travel. It is also not necessary to request evidence of medical training or certification for the person accompanying the beneficiary.
Travel expenses include transportation, food, and lodging. A trust administrator can also pay for entrance fees for activities when accompanying the beneficiary. A reasonableness test is recommended for the number of people required to accompany the beneficiary and may be more than one person. Those accompanying the beneficiary must provide services or assistance. For example, the trust may pay for two parents but cannot pay for other minor children.
42. What about third-party travel expenses to visit a trust beneficiary?
Payment of third-party travel expenses to visit a trust beneficiary to ensure the safety or medical well-being of the trust beneficiary are allowed and do not violate the sole benefit rule in the following situations:
- Reimbursement of travel expenses to oversee the trust beneficiary’s living arrangements when the beneficiary resides in a long-term care facility (for example an institution, nursing home, a group home, assisted living facility or other supported living arrangement).
- Travel for a trustee, trust advisor named lit the trust, or successor, to exercise his or her fiduciary duties or to ensure the well-being of the beneficiary when the beneficiary does not reside in an institution.
43. Must the SNT be the legal owner of a car, house or other property?
Purchased goods that require registration or titling must be titled or registered in the name of the beneficiary or the trustee, unless state law does not permit it. For example, state law may not allow a car to be registered to the beneficiary or may require co-owner if the beneficiary is a minor or an individual without a valid driver’s license.
Some state Medicaid agencies may permit a car to be titled in a third party’s name if the trustee holds a lien on the car that guarantees that the trust receives the value of the car if it is sold and prevents the purchase from being considered a transfer of resources.
Caution: Even if a third party is listed on the title of the purchased goods, it must still be used for the sole benefit of the trust beneficiary.
44. What are the rules on charge and debit cards?
It is now acceptable to offer administrator-managed prepaid cards, such as True Link cards. These cards are a type of restricted debit card that can be customized to block the cardholder’s access to cash, specific merchants, or entire categories of spending. The trustee is the owner and administrator and the trust beneficiary is the cardholder.
Giving a beneficiary access to an administrator-managed prepaid card offers independence while allowing the trust administrator to have controls in place.
45. Can the SNT pay for the funeral and other death related disbursements?
SNTs, any burial arrangements should be made and paid to the funeral director prior to the death of the beneficiary. The amount of the burial fund that is excluded is subject to individual state rules. In addition, some states require irrevocability, while others do not. (SI 01120.201H.) Life insurance funded funeral arrangements, which are funded by an irrevocable life insurance policy, are excluded resources no matter the amount. In any case, these are expenses that are proper disbursements from a SNT.
If you are searching for a special attorney, someone who is experienced, likeable as a person and professional, call Mr. Niemann. I felt good about my choice.
—Frank Mollo, Manchester, NJ
Bottom Line: I know that the above was an exhaustive list of questions and answers. Maybe now you think it’s time to plan for a Special Needs Trust. If you have a child or a loved one with a disability who is receiving or may receive means-tested government benefits, a special needs trust may be right for you. It can be an essential part of your estate plan.
Find out more. Call our office today.
Ask me to personally discuss your New Jersey Special Needs Trust situation toll-free at (855) 376-5291 or e-mail me at firstname.lastname@example.org.