Special Needs Trusts

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=3 height=85 BGCOLOR="#003333" TEXT="#F7F7FF" bgproperties="fixed" background="01000550dduajq.jpg"> <div> <I>Special Needs Trusts</I></div> <div> </div> </td> </tr><tr> <td valign="top" rowspan="2" width=185 BGCOLOR="#003333" TEXT="#F7F7FF"> <div> <A HREF="id12.htm" TARGET="_top" TITLE=" Trust and Estate Planni"><B>Return to Estate Planning</B></A></div> <bR> <div> <A HREF="index.htm" TARGET="_top" TITLE="Law Offices of Mathews Bergen Grier"><B>Home</B></A></div> <bR> <div> <A HREF="mailto:mbglaw@cts.com" TARGET="_top" TITLE="mailto:mbglaw@cts.com"><B><IMG SRC="01573ce0.jpg" border=0 width="115" height="206" ALT="E-mail MATHEWS BERGEN & GRIER" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></B></A></div> </td> <td valign="top" height=367 width="100%" BGCOLOR="#FFFBF0" TEXT="#080000"> <div> <B>Special Needs Require Special Planning:  The Special Needs Trust</B></div> <bR> <div> Supplemental Security Income (SSI) and Medicaid (in California, called “MediCal”), are very important for people with disabilities in need, as they provide cash benefits as well as important medical coverage. The income level and financial resources of an individual with a disability, or family who is applying on behalf of their child with a disability, must not exceed a certain level in order qualify for these government benefits. Benefit recipients are allowed to retain only a total of $2,000 in assets, with some exceptions. A person with a disability receiving SSI, who accumulates more than $2,000 in cash resources may lose SSI and, possibly, MediCal.</div> <div> Government cash benefits provide only for the bare necessities: food, shelter, and clothing. They amount to less than a federal poverty level income. As we all know, there are more things and activities beyond these basics that add quality to life. For a parent planning for the future of their child with special needs, this poses a problem. When parents are able to care for their child, they provide the extras beyond the bare necessities to make their child’s life comfortable. But who will provide those resources when they are not there to do so? If parents leave any assets to their child who is receiving government benefits, they run the risk of disqualifying the child from receiving government benefits. If they leave assets to another family member or other person for the care of the child, they open other avenues of risk where the child might not get the benefit of those assets, such as divorce, bankruptcy, lawsuits, and financial mismanagement.</div> <div> Fortunately, the government established rules allowing assets to be held in trust for a recipient of SSI, as long as certain parameters are met: The trust must be created for a person with a disability (the beneficiary) under the age of 65 by the person’s parent, grandparent, legal guardian, or the court. It must not be created by the person with a disability. Additionally, the beneficiary cannot control the amount or the frequency of trust distributions; and the beneficiary cannot revoke the trust and use the trust assets for his or her personal benefit.</div> <div> States like California have their own requirements that payback provisions be added onto all trusts so that the state receives amounts remaining in trust upon the death of the individual for the cost of all benefits provided by the state MediCal agency to the individual. If the individual has resided in more than one state, the trust must provide that the funds remaining upon death of the individual are distributed to each state in which he or she received MediCal.</div> <div> These trusts, called Supplemental Needs or Special Needs Trusts (SNTs), preserve government benefit eligibility and leave assets that will meet the supplemental needs of the person with a disability, those that go beyond food, shelter, and clothing. The SNT can fund those pleasures and comforts. In fact, the SNT must be designed specifically to supplement, not supplant, government benefits. Money from the trust cannot be distributed directly to the person with a disability. Instead, it must be distributed to third parties to pay for goods and services to be used by the person with a disability.</div> <div> The SNT can be used for various expenditures such as :</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Out-of-pocket medical and dental expenses </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Eyeglasses </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Annual independent check-ups </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Transportation (including vehicle purchase) </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Maintenance of vehicles </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Insurance (including payment of premiums) </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Rehabilitation </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Essential dietary needs </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Purchase materials for a hobby or recreation activity </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Purchase a computer or electronic equipment </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Pay for trips or vacations </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Pay for entertainment like going to a movie, a ball game, concert, etc. </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Purchase of goods and services that add pleasure and quality to life: videos, furniture, or a television </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Athletic training or competitions </div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Personal care attendant or escort</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Legal fees</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.png" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">Fines and taxes, if any</div> <bR> <div> <B>When should an SNT be set up?</B></div> <div> Parents, grandparents or other interested persons,  may consider setting up an SNT when they begin their future planning activities such as drawing up their wills. If their child with a disability will likely have long-term medical needs, the SNT can be a vehicle to supply the funding to provide lifetime quality care. Even if the child’s future prognosis is unclear, it is never too early to put plans in place for contingencies such as the parents’ sudden death or disability.</div> <div> <B>How is a SNT set up?</B></div> <bR> <div> The laws governing trusts are complex and are subject to changes in legislation that may vary by state and which could affect a person’s eligibility for the government benefits that they depend upon. New regulations have considerably tightened the eligibility criteria for receiving government benefits and thus have affected many aspects of the way SNTs are drawn up. These regulations are complex and require a strong knowledge of the current legislation and how it impacts people planning for their child with special needs in order to preserve eligibility. Setting up a special needs trust requires coordinate planning with an attorney knowledgeable in special needs planning who can draft a will and necessary trust documents.</div> <div> When a parent or grandparent dies, additional assets can be distributed, under a will, to the SNT. A percentage of shares in an estate can be left to a child's  SNT. Funding can come from discretionary contributions while parents are alive, probate distributions, a living trust, life insurance, pension plan, or other sources. Therefore, the individual with a disability does not have to be left out of a will, but should have their share of inheritance directed to his or her SNT. In the case of a life insurance policy, pension plan, or other source that would go to a beneficiary on death, the child’s SNT should be the beneficiary.</div> <bR> <div> <B>Types of SNTs</B></div> <div> There are two types of SNTs. An experienced attorney can explains the benefits and disadvantages of each. </div> <div> Intervivos SNTs: created and funded while the parents or grandparents are alive. </div> <div> Testamentary SNTs: included in the will and funded as part of the probate process of the Last Will and Testament.</div> <div> Irrevocable trusts are used in many special needs planning situations. The irrevocable nature of the trust helps protect the money on behalf of the beneficiary who has a disability. Irrevocable trusts can be funded during the life or at the death of the person who is granting the funds.</div> <div> The Social Security Administration, the federal agency that administers SSI, evaluates trusts that have been set up for individuals with disabilities who are receiving government benefits to determine if they are countable resources for those individuals. According to the SSA, if the individual has the legal authority to revoke the trust and use the principle of the trust to meet his or her needs for food, clothing or shelter, it is considered a countable resource. All trusts set up with the assets of the disabled person, or all "self-settled trusts" must be irrevocable and meet the Social Security Administration definitions to not be considered countable resources for SSI purposes. </div> <bR> <div> <B>Managing the SNT</B></div> <div> Having an SNT requires a trustee to be appointed. A trustee is one who manages another's property and may be a person or an institution such as a bank. In this case, the trustee is the manager of the trust and has general unlimited discretion to use trust proceeds provided for the needs of the individual with a disability. The trustee may be given full discretion to manage the money in the trust and to decide how the money is used for the person's benefit. The SNT should be drafted in such a way as to direct the trustee in how to use the trust's resources for the individual's needs.</div> <div> Trustees should have good money management/financial skills. The SNT will likely exist for a long period of time. Trustees should be chosen with longevity in mind, and the trust itself should be drafted to adjust to changing circumstances, such as to allow trustees to be changed or removed.</div> <div> After the death of the individual with a disability, the trustee oversees the final arrangements and the SNT usually ends. However, the trustee may terminate the SNT if laws change or the SNT is challenged by the government.</div> <bR> <div> <B>Staying on top of changes</B></div> <div> There have been some recent changes to the law affecting transfers to trusts that were intended to make sure that only people who truly need government assistance have access to it. The Omnibus Budget Reconciliation Act of 1993 (OBRA 93) was designed to discourage and/or penalize those people with middle to upper income levels seeking to transfer (give away or sell) their assets to the next generation while accessing MediCal to pay for their own long-term care. OBRA 93 established "disqualification periods" in which the person is rendered ineligible because the assets that they wanted to transfer are counted as resources. The disqualification periods range from up to 36 months for outright gifts, and 60 months, or more in some cases, for transfers to trusts.</div> <div> This presents a dilemma for parents of children with disabilities who may need to seek MediCal coverage for their own long-term care. Fortunately, Congress provided special treatment for these parents transferring assets to or for the benefit of their child with a disability. Asset transfers could be made to Special Needs Trusts by the parent of a child with disabilities, grandparent, legal guardian, or court seeking SSI and MediCal with no disqualification period, provided that the cost of the benefits are repaid after the death of the individual with disabilities.</div> <div> Another such law affecting trusts is the Foster Care Independence Act of 1999 (P.L. 106-169). Section 205 of this law provides that trusts established with the assets of an individual (or spouse) will be considered a resource for SSI eligibility purposes. It also addresses when earnings or additions to trusts will be considered income. These provisions are effective for trusts established on or after January 1, 2000.</div> <div> All trust documents for any self-funded trust (even one with Court approval) are thoroughly reviewed by the Social Security Administration or MediCal to make certain that they comply with the new law. The new regulations call for close scrutiny as to whether any trust assets or income can be attributed to the person with a disability, or can be indirectly tied to that person. If any assets can be traced to that person, the SSA may deny benefits, require that assets be spent down below the $2,000 SSI threshold, or that payback provisions be written into the trust document.</div> <div> Many states have their own additional sets of criteria that they utilize to evaluate SSI eligibility when special needs or supplemental needs trusts are also presented. These state guidelines often impose more stringent guidelines than federal SSA regulations.</div> <bR> <div> <B>Pooled or Community Trusts</B></div> <div> In addition to the SNT, another form of trust for a person with a disability is the Pooled Income Trust also known as a Community Trust. These trusts contain the assets of a person with a disability and must meet the following criteria :</div> <div> Must be established and maintained by a nonprofit organization which maintains separate accounts for each individual with a disability, but for management of funds, the accounts in the trust fund are pooled and each account is set up with the sole purpose of benefiting and individual with a disability. </div> <div> Unlike the regular, non-Court authorized SNT, a Pooled Income Trust <I>may</I> be funded by the individual with a disability as well as a parent, grandparent, legal guardian, or court; The funds remaining in the trust after the individual dies may be designated to be retained by the nonprofit organization, but if not, the state may claim the right to be reimbursed for medical expenses paid on the individual's  behalf.</div> <div> There are many nuances and complex issues involved in setting up a plan for the future of an individual with special needs which must be handled correctly. There is too much at stake for the individual to loose if proper planning is not in place. It is crucial to find an attorney experienced in trusts involving a person with a disability.</div> <bR> <bR> </td> <td valign="top" width=28 BGCOLOR="#003333" TEXT="#F7F7FF"> <bR> </td> </tr><tr> <td valign="top" colspan=2 height=28 BGCOLOR="#003333" TEXT="#F7F7FF"> <div> <IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="9"><B>       </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="17"><B>   </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="17"><B>       </B><IMG BORDER="0" SRC="1x1.gif" HEIGHT="17" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" WIDTH="9"></div> <bR> </td> </tr></table></body>