Special Needs Trusts
There are three types of special needs trusts or supplemental needs trusts (SNT) used in planning for adult beneficiaries with disabilities: third-party trust, self-settled trust, and pooled trust. A third-party trust is created by someone other than the beneficiary and funded with assets that do not belong to the beneficiary.
A self-settled trust is funded with assets belonging to the beneficiary. Though many of the provisions of a third-party SNT and a self-settled SNT are the same, there are some fundamental differences of which you should be aware of.
A pooled trust is a trust established and administered by a non-profit organization. A separate account is established for each beneficiary of the trust but for the purposes of investment and management of funds, the trust pools the accounts.
A third party SNT typically is created by a parent or other relative of a person with a disability. The trust can be created under a will, (a testamentary trust), or during the creator’s lifetime under an inter vivos trust agreement, (a living trust). The trust can be revocable or irrevocable. A revocable special needs trust is considered part of the grantor’s estate for estate tax purposes. If the trust is irrevocable, the creation and funding of the trust is treated as a gift for gift tax purposes.
The trust is typically funded with assets belonging to the creator, who is called the grantor or settlor. The assets of the disabled beneficiary are never used to fund the third party SNT.
- With an SNT the beneficiary should have no enforceable right to compel distribution either directly to the beneficiary or for his or her support. With this provision, the assets of the trust are not subject to state Medicaid reimbursement claims nor are the assets deemed an “available” resource for eligibility purposes for means-tested public benefits programs.
- If the trust requires distribution of income to the beneficiary or is a support trust for the beneficiary, the trust assets will be deemed an available resource and will be subject to the cost of care claims by the state. A poorly drafted trust may keep an individual from qualifying for Medicaid or other benefits.
Consequently, in drafting an SNT it is important to clearly state the Grantor’s intent that distributions are to be made solely in the absolute discretion of the trustee for the benefit of the beneficiary. The trust should clearly state that the trustee is under no obligation to disburse to the beneficiary or for the beneficiary’s support.
A self-settled trust is funded with resources belonging to the person with disabilities. As such, it will adversely affect eligibility for means-tested pubic benefit programs, unless certain statutory requirements are observed. There are two types of self-settled trusts that can be used in Virginia: the (d)(4)(a) trust and the pooled trust. Virginia does not require that either type of trust be pre-approved by the State before it is used.
1. The (d)(4)(A) Trust
Under federal law, 42. U.S.C. §1396p(d)(4)(A), a trust can be established for a person with disabilities and funded with their assets, without adversely affecting the beneficiary’s eligibility for Medicaid or SSI, if the following requirements are met.
- The beneficiary must be under the age of 65 years at the time the trust is funded.
- The beneficiary must be disabled as defined by the SSI program (42 U.S.C. §1382c(a)(3).).
- The trust may be established by the person with disabilities or by a parent, grandparent, guardian/conservator, or a court.
- The trust must be for the sole benefit of the disabled beneficiary during his or her life.
- Following the death of the disabled beneficiary, the State must be reimbursed from any remaining trust assets any amounts paid on behalf of the beneficiary under the state Medicaid program.
(N.B. There is no requirement that SSI benefits be repaid.)
2. Pooled Trusts
Federal law also allows a disabled beneficiary to transfer his or her assets to a “pooled trust” without adversely affecting their public benefit, 42 U.S.C. §1396p(d)(4)(C). Such a trust must meet the following requirements.
- The trust must be established and managed by a nonprofit association.
- Separate accounts must be maintained for each beneficiary, but for purposes of investment and management of funds, the trust may pool the accounts.
- The account in the trust must be established by a parent, grandparent, legal guardian of the beneficiary, the beneficiary or a court.
- At the death of the beneficiary, if there is anything remaining in their account it can either be retained by the trust for the benefit of other trust beneficiaries or it can be paid to the State as reimbursement for Medicaid paid on behalf of the beneficiary. This means if the trust does not get to keep all of the remaining trust assets, then the State is entitled to be paid back before any of the remaining trust assets can be paid to other remainder persons.
- The beneficiary must be disabled as defined in 42 U.S.C. §1382c(a)(3).
ELEMENTS OF A SPECIAL NEEDS TRUST
Regardless of whether the special needs trust is a third-party trust or a self-settled trust, there are certain elements that must be included in the trust. A special needs trust is established by a trust agreement. There is a grantor or settlor, the person who establishes the trust, a beneficiary, the disabled beneficiary, and a trustee, the person who administers and manages the trust.
The trust agreement must clearly show the following:
- The trust is managed by a trustee who is not the disabled beneficiary. The trustee can be a family member or an institution or other professional.
- The trust agreement gives the trustee the absolute and uncontrolled discretion to provide whatever assistance the trustee deems advisable.
- The trust agreement never allows the disabled beneficiary to receive income or resources that would render him or her ineligible for needed public benefits.
- The trust assets are to be used to supplement, not replace, public benefits.
- The trust agreement should provide instructions for the beneficiary’s final arrangements.
- The trust agreement must direct who will receive the trust assets after the beneficiary dies.
- The trust agreement should provide for successor trustees.
- The trust agreement must protect the trust assets against creditors or government agencies trying to obtain funds to pay the debts of the beneficiary.
- The trust agreement should provide for early termination if the trust jeopardizes the child’s eligibility for public benefits.
- The trust agreement should authorize the trustee to amend the trust if necessary to comply with changes in the law.
CONTACT A NORTHERN VIRGINIA ESTATE PLANNING ATTORNEY
In addition to creating the trust document, it is extremely important that the family consider how the trust will be adequately funded. The funding of the trust must be realistic in relation to the disabled child’s needs. In the event that the family has insufficient resources to adequately fund the trust, life insurance should be considered.
Are you looking for an attorney to create a special needs trust for a disabled loved one in Northern Virginia? If so, contact Hale Ball Carlson Baumgartner Murphy, PLC for the professional assistance you’re looking for.
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