The Voice is the email newsletter of The Special Needs Alliance. This installment was written by Amy C. O’Hara, an attorney with the New York law firm of Littman Krooks LLP. Her practice focuses on special needs planning, trust administration, guardianships, elder law, veterans’ benefits and estate planning and administration. Amy is a member of the Special Needs Alliance and active participant of the publications committee. She is also a member of the New York State Bar Association. Amy graduated from the State University of New York at Buffalo Law School.
You have a special needs trust— or you have been designated as the trustee of a special needs trust— or your child has a special needs trust. What is a trust? What is a trustee? What is a beneficiary? What are all these terms you’ve never used before even though your first language is English? This article provides you with an overview of the more common terms found in your special needs trust.
What is a Trust? A trust is a legal arrangement in which a person or a financial institution, called the trustee, holds and manages assets for the beneficiary (see definition below). The trust document explains the trustee’s authority, how the trust is to benefit the beneficiary, and how and when the trust is to terminate. There are many types of trusts, but this article is focusing on a specific type of trust—a special needs trust.
A special needs trust (SNT) is a trust that will preserve the beneficiary’s eligibility for needs-based government benefits such as Medicaid and Supplemental Security Income (SSI). Because the beneficiary does not own the assets in the trust, he or she can remain eligible for benefit programs that have an asset limit. As a general rule the trustee will supplement the beneficiary’s government benefits but not replace them. Examples of supplemental needs are costs for sitters, companions, and dental or medical expenses not covered by Medicare or Medicaid.
A first-party SNT, also referred to as a “self-settled” or “(d)(4)(A) trust,” is funded with assets or income that belong to an individual with a disability (see definition below) and who is the beneficiary of the trust. In order for the assets of this type of trust not to count for Medicaid or SSI purposes, federal law requires that the beneficiary must be under the age of 65 when the trust is created and funded; the trust must be irrevocable and provide that Medicaid will be reimbursed upon the beneficiary’s death or upon termination of the trust, whichever occurs first; and the trust must be administered for the sole benefit of the beneficiary. Typically the funding comes from a personal injury settlement or inheritance the beneficiary receives directly.
A third-party SNT, frequently referred to as a supplemental needs trust, is funded with assets belonging to a person other than the beneficiary. In fact, no funds belonging to the beneficiary may be used to fund the trust. Typical funding comes from gifts, an inheritance from parents or grandparents, and proceeds of life insurance policies. This trust has no provisions to pay back Medicaid upon the trust’s termination; rather, the person creating the trust decides how the trust estate is distributed when the beneficiary dies.
The following terms are commonly found in first-party and third-party special needs trust agreements:
Grantor — A grantor is the person who creates and funds the trust. This person is also commonly referred to as a settlor or trustor. In first-party SNTs, the grantor is actually the beneficiary because the law requires that the trust be funded with the beneficiary’s own money, but that it be established by a parent, grandparent, legal guardian or a court. In third-party SNTs, the grantor is anyone other than the beneficiary, usually a parent or other family member.
Trustee — A trustee is the person or entity who manages the trust assets and administers the trust provisions. A trustee can be a family member, friend or colleague of the beneficiary, a professional, or a combination of the two. A professional trustee generally is a corporate trust department or an attorney. It is common for more than one person to serve as trustee at the same time.
Successor Trustee — A successor trustee is nominated in the trust agreement and is the person or entity to take over when the initial trustee is no longer able to serve. The trust agreement usually has specific requirements that the successor trustee must satisfy before assuming the trustee role.
Beneficiary — A beneficiary is the person for whose benefit the trust is established. In first-party SNTs, the beneficiary must be a person who is classified as disabled by the Social Security Administration (SSA). In some states, the beneficiary of a third-party special needs trust must also be a person with a disability.
Remainder beneficiary — When the trust ends (usually upon the beneficiary’s death), the remainder beneficiaries are the individuals who will receive any remaining trust assets. In first-party SNTs, the state’s Medicaid division is typically the first remainder beneficiary (note that in some states, Medicaid is not considered a beneficiary but rather a creditor). After Medicaid is reimbursed for the services it provided to the beneficiary, if trust assets still remain, they usually pass to the beneficiary’s estate, or in some cases to persons named as remainder beneficiaries in the trust instrument. In third-party SNTs, the grantor of the trust decides who the remainder beneficiaries are. Medicaid should never be named as a remainder beneficiary of a third-party SNT.
Compensation — Unless the trust agreement states otherwise, trustees are usually entitled to compensation for their services. Compensation is usually set forth in state law. If a corporate trustee is serving, it usually receives a fixed amount, based upon the value of the trust estate. All compensation is reportable as taxable income to the trustee.
Trust Estate — The trust estate consists of assets placed into the trust and managed by the trustee for the benefit of the beneficiary. It also includes income earned from invested trust assets.
Schedule A — Also known as a schedule of assets, Schedule A identifies all of the assets owned by your trust. It is important for the trustee to keep this schedule up to date.
Irrevocable — An irrevocable trust is a trust that cannot be revoked or changed. All first-party SNTs must be irrevocable. A third-party SNT can be either irrevocable or revocable.
Revocable — A revocable trust is a trust in which the grantor can revoke or change the trust terms at any time. Only third-party SNTs can be revocable. Revocable trusts usually become irrevocable no later than the death of the grantor, if not sooner.
Testamentary — A testamentary trust is a trust created under a last will & testament and is not funded until the death of the person who created the will. A testamentary trust can only be a third-party SNT.
Inter vivos — “Inter vivos” is a Latin term that means “among the living” or “during life.” An inter vivos trust is a trust established during the lifetime of the person creating the trust. All first-party SNTs are inter vivos. An inter vivos third-party SNT can be revocable or irrevocable.
Disability — The beneficiary of a first-party SNT must have a disability recognized by section 1614(a)(3) of the Social Security Act. You can visit http://www.ssa.gov/disability/professionals/bluebook/ for a complete list of SSA-recognized disabilities for adults and children.
Bond or Surety — At times, a trustee is required to obtain a bond, which provides protection to the beneficiary against the possibility of fraud, negligence or loss of trust assets by the trustee. A bond is similar to an insurance policy in that if the trustee negligently or fraudulently lost trust assets, the bonding company agrees to pay a specified amount of money to reimburse the trust. Frequently when family members are serving as trustee, courts or Medicaid will require the trustee to obtain a bond.
Accounting — The accounting is an explanation of the trust activity for a specified time period (usually a year). The accounting is prepared by the trustee, or an accountant or attorney hired by the trustee to prepare the accounting on the trustee’s behalf. The accounting can be simple or very detailed. It is important to review the language in the trust agreement to know what the accounting requirements are. For example, in addition to providing the accounting to the beneficiary, the trustee may need to file the accounting with the court, the Social Security Administration or the state Medicaid agency.
Special needs trusts are complex. The language used in special needs trusts can vary greatly from one trust agreement to another and from state to state. It is essential for trustees and trust beneficiaries to understand the terms in the written trust agreement. A legal professional experienced in special needs planning can ensure that the trust document will meet the needs of the trust beneficiary, the person who is funding the trust and the trustee who is administering the trust.
About this Newsletter: We hope you find this newsletter useful and informative, but it is not the same as legal counsel. A free newsletter is ultimately worth everything it costs you; you rely on it at your own risk. Good legal advice includes a review of all of the facts of your situation, including many that may at first blush seem to you not to matter. The plan it generates is sensitive to your goals and wishes while taking into account a whole panoply of laws, rules and practices, many not published. That is what The Special Needs Alliance is all about. Contact information for a member in your state may be obtained by calling toll-free (877) 572-8472, or by visiting the Special Needs Alliance online.
Requirements for Reprinting this Article: The above article may be reprinted only if it appears unmodified, including both the author description above the title and the "About this Newsletter" paragraph immediately following the article, accompanied by the following statement: "Reprinted with permission of the Special Needs Alliance - www.specialneedsalliance.org."