Articles

Special Needs Trusts

by William King Self , Jr., CELA

A special needs trust (SNT) can provide lifetime assistance to a person with a disability. Many persons with disabilities are eligible for SSI or Medicaid because of their limited assets and income. Unfortunately, SSI benefits are barely enough to pay for basic subsistence, leaving no money to pay for a comfortable life. Many persons with disabilities are dependent upon Medicaid because their medical condition makes them unable to qualify for private health insurance. Both Medicaid and SSI have strict limitations on the amount of assets a recipient may have. Available assets—money considered to be available to pay medical and other bills—is generally limited to $2,000 for an individual, $3,000 for a couple. Receiving a gift, inheritance or personal injury settlement directly would disqualify a recipient from getting Medicaid and SSI. Any personal injury settlement or gift could be rapidly depleted just paying for the individual’s basic needs and medical care formerly paid by SSI and Medicaid. In such a situation, a special needs trust is a solution that can protect both the government benefits and the gift or settlement. The trustee of the SNT can then use the assets in the trust to enhance the quality of life for the beneficiary.

There are two types of special needs trusts: “third-party trusts” and “self-settled trusts.” Self-settled SNTs are sometimes called “pay-back trusts.” The law treats the two types of SNTs very differently. A self-settled SNT is used for assets that already belong to the disabled beneficiary or which he is entitled to receive. The assets in a self-settled SNT are not treated as being “available” for purposes of the Medicaid and SSI qualification process. This treatment allows the trustee to protect and use the trust assets for the beneficiary’s supplemental needs over his or her lifetime. Federal law requires, however, that after the beneficiary dies the trustee must pay the state for any Medicaid services the beneficiary had received before any distributions are made to the trust remainder beneficiaries. In contrast, a third-party SNT is not property that is owned by the disabled person, and so the trust does not have a pay-back requirement. This type of SNT is established in wills or “inter-vivos” (during the donor’s lifetime) for the benefit of a disabled loved. Because the assets do not belong to the disabled beneficiary, the trust does not disqualify the beneficiary from needs-based government programs like Medicaid.

The main type of self-settled SNT, sometimes called a “d4A” trust after the provision in federal law authorizing it (42 U.S.C. Sec. 1396p(d)(4)(A), in the Social Security Act), is the trust that is often used to protect personal injury settlement proceeds of a disabled person. This type of SNT cannot be established by the disabled person himself. A d4A SNT can only be established by the beneficiary’s parent, grandparent, guardian, or a court. Unfortunately, a d4A SNT can only be established for a disabled person under age 65. After the disabled person’s assets are transferred to the trust, however, eligibility for government benefits is protected. The assets are also protected from claims of future creditors. The protected assets can be used by the trustee for any supplemental needs the beneficiary may have during his or her lifetime, but the attorney handling the personal injury settlement must repay Medicare and Medicaid before the remaining personal injury settlement proceeds are deposited into the SNT.

Special needs trusts must be carefully drafted by an attorney who is experienced in special needs and disability planning. The provisions must be carefully tailored, both in order to comply with strict SSI and Medicaid rules and in order to provide for the particular needs of the beneficiary. Selection and advising the trustee is also important, because the distributions from the SNT must follow complicated federal and state regulations for programs like SSI and Medicaid.

Prepared by:
William King Self, Jr.
Certified Elder Law Attorney
Apperson, Crump and Maxwell, PLC
6000 Poplar Avenue, Suite 400
Memphis, TN 38119
(901) 756-6300
www.elderlawmemphis.com