Gone are the days when a parent had to disinherit a child with a disability. The use of a Special Needs Trust (SNT), also known as a Supplemental Needs Trust, can allow a child or other loved one with a disability to receive an inheritance and continue eligibility for Medicaid, SSI or other public benefits.

Gone also are the days when a person with a disability received a cash settlement from a law suit or received other money only to cause the loss of Medicaid, SSI or other public benefits.

The Law That Made the Difference

In 1993, Congress created public benefit exemptions under the Omnibus Budget and Reconciliation Act to help individuals with disabilities.  Located in Title 42 of the United States Code 42 USC §1396p(d)(4), the statue provides that if a trust meets certain requirements, that a transfer of assets into a SNT will not cause ineligibility for either SSI or Medicaid.

The Two Kinds of Special Needs Trusts:

Self-settled SNT and Third Party SNT

A self-settled Trust is authorized under (d)(4)(A) of 42 USC 1396p.  Such a Trust is also known as a “(d)(4)(A) SNT.”  It is self-settled because it is funded with assets belonging to the person with a disability, typically from gifts made directly to the person or from a law suit settlement proceeds in the person’s name.  For the same reason, a (d)(4)(A) SNT is also known as a First Party SNT.

The second kind of SNT is known as a Third Party SNT because such a trust is established by someone other than the person with a disability with funds or assets belonging to that third party.

How does a Self-settled Trust work?

As 42 USC 1396p (d)(4)(A) provides, a First Party SNT must satisfy five requirements:

  1. The beneficiary of the trust must be under 65.
  2. The assets in the trust must have belonged to the beneficiary.
  3. The trust must be established by a parent, grandparent, guardian, or court.
  4. The trust must provide that at the beneficiary’s death, the State is repaid for the Medicaid provided during the beneficiary’s life (the “payback” requirement).
  5. The trust distributions will supplement the basics provided by Medicaid and SSI.

A First Party Trust usually has to be established by a court order.

How is a Third Party Special Needs Trust Different?

By contrast, a “Third Party” SNT – one that is funded with assets not belonging to the beneficiary – is not subject to the payback requirement described above.  All property remaining in a Third Party SNT at the death of the beneficiary may be distributed to others as the trust agreement directs.  Thus, it is essential that the assets of Third-Party SNTs are not commingled with the assets of First Party SNTs, which would unnecessarily subject the assets of the Third Party SNTs to the payback requirement.  A further advantage of Third Party SNTs is that there is no age limitation or specific disability requirement, in contrast to Third Party SNT.

Other advantages of a Third-Party SNT are:

  • Allowable distributions to the beneficiary are broader and more generous.
  • There is less scrutiny by Social Security Administration and Medicaid Agency.
  • Most Third-Party Trusts do not need court approval.

Why Special Needs Trusts are Important

 They protect government benefits eligibility. Special Needs Trusts allow an individual with a disability to have funds available for his or her benefit without the funds counting as a countable financial asset.

They protect the opportunity to access superior care and services options. Without Special Needs Trusts many individuals with disabilities are relegated to a subsistence level of life and are denied access opportunities and options.

Persons with disabilities have higher medical care costs and may need special equipment and help with even the most basic tasks.  The SNT can purchase a customized, accessible van appropriate for the beneficiary’s circumstances and pay the cost of the maintenance and insurance. Similarly, SNT assets can be used to pay for beneficial living arrangements, including additions or renovations to the beneficiary’s residence to render it accessible, the cost of a communal or assisted-living arrangement, or a private room in a skilled nursing facility.

Other common SNT disbursements include funds for:

  • Appropriate recreational and vocational activities.
  • Hobbies and vacations.
  • Educational and training opportunities.
  • Special communication equipment.
  • Professional services for the beneficiary, including social workers, attorneys, accountants, and claims processors.
  • Procurement and maintenance of a pet or service animal for the beneficiary.

Permissible disbursements from a SNT are limited only by the creativity of the drafting attorney and the overriding requirement that the beneficiary derive the primary benefit.

Selecting a Trustee

Selecting an appropriate trustee is critical to the effectiveness of the SNT, and many variables must be evaluated in this regard, including the prior experience of the proposed trustee with administering SNTs and the relevant fee schedule that would apply to the SNT.

Because the administration of the SNT is labor-intensive, a professional trustee, such as a bank or trust company, can best perform the fiduciary tasks.  Although it may appear that the parents, guardians, or other family members of the beneficiary would be sensible candidates to assume the office of trustee of the SNT, the law in some jurisdictions specifically precludes such persons from serving in that capacity.  In many cases, such persons are often the presumptive remainder beneficiaries of the SNT after death of the beneficiary; thus, they might be tempted to “skimp” on disbursements for the beneficiary to help ensure that a larger fund is available after the death of the beneficiary for distribution to the remaindermen.  Using a corporate trustee avoids this concern and also ensures that the management of the SNT will not be interrupted by the incapacity or death of individuals who might otherwise serve as trustees.

The Future is Bright

Persons with disabilities, and their concerned families, no longer need to contemplate a grim future with limited options.  There is a heightened public awareness of the many planning options available to secure the future of persons with disabilities. Competent special needs planning advice in this emerging area of law bodes well for the disabled population and those who endeavor tirelessly to provide the best care for them.

The attorneys of Anderson, Brogan and Yonkers, Scott J. Brogan, John E. Yonkers, III, and Robert C. Anderson, have been trained by the Academy of Special Needs Planners and the National Academy of Elder Law Attorneys.


Trust Planning for Families with Special Needs Children in Michigan and Wisconsin

If you have a disabled or special needs child, you may need help understanding, applying for, and maintaining disability benefits for your child. We can help you understand the purpose and structure of all of the various benefit programs that may be available to your child and help you create a disability plan that will ensure the safety and welfare of your child into the future. Types of disability benefit programs include Medicaid, Social Security disability, supplemental Social Security income, VA benefits, long-term health care insurance, and disability plans provided by your job or insurance plans. We can also help you set up a special needs trust for your disabled child so that you can pass along your property or assets to him or her without jeopardizing his or her eligibility for these government benefits in the future.

Special Needs planning and Disability planning involves understanding all of the county, state, federal, and other benefit programs available and organizing them to ensure that your disabled child’s future well-being and security is established and maintained.

For more information, we invite you to examine the following:

Special Needs Trusts

For a free handout on Special Needs Planning and Special Needs Trusts in Michigan and Wisconsin, or if you would like more information regarding Elder and Special Needs law, Medicaid and Medicare planning, Powers of Attorney, VA Benefits, Tax and Estate Planning Law, or Wills and Trusts please feel free to email upelderlaw@upelderlaw.com or call us at (906) 228-6212. We regularly see clients in Sault Ste. Marie, Iron Mountain, Marquette, Houghton, Menominee, Marinette Wisconsin and Escanaba.