The Voice is the e-mail newsletter of The Special Needs Alliance. This installment was written by Special Needs Alliance member, Amy C. O’Hara. Amy is an attorney with Littman Krooks LLP with offices in New York City, White Plains, NY and Fishkill, NY. Most of her work involves helping people with special needs planning (trusts, guardianships and government entitlements), estate planning and administration (wills and trusts), elder law issues (Medicaid and Medicare, Veterans’ Benefits, guardianships).
SNT assets can be used to purchase a home for the beneficiary, services that Medicaid does not cover (including special therapies, wheelchairs, handicap accessible vans and mechanical beds), recreational and cultural experiences and, for the most part, any services or items that would enrich the beneficiary’s life.
Several requirements must be met when establishing a SNT. First, the trustee must be given absolute control over the distribution of the trust assets. Neither the beneficiary nor anyone acting on his behalf can demand distributions be made from the trust. Second, the beneficiary cannot have authority to revoke or amend the trust; otherwise the trust assets would be deemed an available resource to the beneficiary, and he would lose his public benefits. Third, the trustee should not give cash outright to a beneficiary receiving SSI, as this would cause an immediate dollar-for-dollar reduction or loss of public benefits.
Generally speaking, there are three types of SNTs: (a) a first party special needs trust; (b) a pooled special needs trust; and (c) a third party supplemental needs trust.
First Party Special Needs Trusts
A first party SNT is funded with assets owned by the trust beneficiary. A first party SNT–also commonly referred to as a “self settled” or “(d)(4)(A)” Trust–may be established to protect current or future means-tested government benefits if an individual is about to receive a settlement, inheritance or other monies that will bring his countable assets to more than $2,000.
First party SNTs are most commonly required when an individual with disabilities has received a settlement from a personal injury action or an inheritance from a well-meaning person who did not understand that such a gift could disqualify the beneficiary from important government aid. Another common use for a first party SNT is for divorce alimony or property division, or for child support payments when dealing with a child who has a disability. Unless such funds are sheltered in a first party SNT or used to purchase exempt resources, the beneficiary would lose his benefits and be required to pay medical bills and many other expenses from the assets until those assets have been spent down to $2,000.
When establishing a first party SNT, there are key requirements that must be provided for in the trust agreement; otherwise, the SNT may not protect the beneficiary’s continued eligibility for public benefits. Also, the beneficiary must be under 65 years of age at the time the SNT is funded and must be disabled as defined in the Social Security Act.
Additionally, the law requires that the SNT must be for the benefit of the individual with disabilities and that it be established by a parent, grandparent, legal guardian of the individual’s property, or the court. The trust agreement must provide a Medicaid payback provision requiring the state Medicaid agency to be reimbursed upon the death of the beneficiary. Finally, the SNT must be irrevocable.
A pooled SNT is also funded with assets that are owned by the trust beneficiary. At times the settlement or inheritance the person receives is small, and a first party SNT may not be the best solution, especially if there is no parent, grandparent or legal guardian available to establish the trust. If spending the funds for the individual’s care or needs or exempt resources is not a viable option, it may be more practical to place the litigation proceeds or inheritance in a pooled special needs trust.
Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the nonprofit organization manages a sub account for the beneficiary. A major difference between a first party SNT and a pooled trust is that an individual with disabilities can establish the pooled trust sub account himself. This is an attractive option for many beneficiaries who have no living parents, grandparents, or a legal guardian of their property.
Third Party Supplemental Needs Trusts
A third party SNT is funded with assets that are owned by parents, relatives or friends, but not assets owned by the trust beneficiary. Third party SNTs are an ideal estate planning vehicle for parents and other friends and relatives who want to leave an inheritance to an individual with disabilities. Parents frequently say that their greatest worry is how their child with disabilities will fare once they have passed away. Not only will a third party SNT shelter an intended inheritance, it can be used during the parents’ lifetimes for ongoing expenses that are not covered by government entitlements.
A significant attraction of the third party SNT is that, unlike a first party SNT, when the beneficiary dies, there is no Medicaid payback requirement. The person who created the third party SNT (often a parent) chooses and has complete control over selection of the trust remainder beneficiaries.
A third party SNT can either be testamentary (created under a will) or inter vivos (created during lifetime). Additionally, an inter vivos third party SNT can often be made revocable or provide an easy mechanism for changes of trustee lineup or remainder beneficiaries if the parents want flexibility to change the trust agreement in the future.
Thoughtful consideration should also be given to the designation of the trustee of any SNT. For example, in situations where the beneficiary’s parents have large estates, sometimes it is recommended that the parents not serve as trustees of an irrevocable SNT due to potential adverse tax consequences.
In choosing a trustee, consider the potential trustee’s ability to (a) be sensitive to the beneficiary’s disabilities, (b) actively monitor any services provided, (c) aggressively advocate for all entitlements, and (d) prudently invest SNT funds. Because of the trustee’s many roles, consider appointing a professional corporate trustee, either to serve alone or to serve jointly with a family member trustee.
Have you had your special needs trust reviewed lately?
Whether you are a trustee or a parent, it is a good idea to have the SNT reviewed periodically (ideally, annually) with your special needs planning attorney. Some of the questions that should be reviewed include:
1. Have there been any changes in the laws that affect the SNT?
2. Do you need to make any changes to the trustees or trust advisors? Perhaps a successor trustee is ill or recently passed away and you need to designate a new successor trustee. Or perhaps you want to consider a corporate trustee if you have not previously designated one.
3. Do you understand the tax ramifications? It is important for you to understand how the income earned in the SNT is reported and on what type of income tax return. Questions you want to review with your attorney are whether your trust is a “grantor trust” for income tax purposes or whether it is considered a “qualified disability trust.” Also, what are the gift tax reporting implications, if any, when a third party makes a gift to the trust?
4. Is the trustee making any distributions that would cause the beneficiary to lose benefits? Constant monitoring and oversight must be made regarding SNT distributions. For example, if the trust is paying housing costs for the beneficiary, the beneficiary may suffer a reduction in his SSI benefit.
5. Are the assets designated to pour into the SNT as intended? Your last will and testament will not control the disposition of certain assets, such as annuities, insurance policies, and retirement plans, if you designate beneficiaries other than the SNT. Your attorney can help you check and update your beneficiary designations on these assets to make certain that they pass to the SNT at your death, if intended.
This overview and list of questions to be reviewed with a special needs planning attorney demonstrates that SNTs are very complex and require careful consideration and planning to ensure that the appropriate SNT has been set up for the beneficiary. By understanding the terms and requirements of the SNT chosen for the beneficiary, you will be in a better position to help protect the beneficiary’s benefits and quality of life.
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