Securing Your Client’s Future with Special Needs Trusts

By Kristin M. Tyler

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You’ve surpassed your client’s expectations – and possibly your own – by securing a considerable settlement award. While you may think your job is done, don’t drop the ball in the fourth quarter by overlooking the fact that your client may need a special needs trust. Be sure to keep these key issues and practice pointers in mind regarding special needs trusts.

Candidates for Special Needs Trusts

Which clients may need these trusts? Any client who would otherwise qualify for Medicaid and/or Social Security Disability (SSDI) benefits but for the settlement award is an excellent candidate for a special needs trust (SNT). Some people might say the individual should use their own funds to pay for their care. Personal opinions aside, public policy favors allowing the individual to use the settlement award to supplement their needs with their own assets via a qualifying trust in addition to receiving public benefits.

There are three variations of SNTs, the main difference between them is who is the person funding the trust. A trust funded by a third party, such as a parent, for the benefit of a disabled individual is referred to as a third party trust. A trust funded with a disabled individual’s own funds – or funds they are legally entitled to – is called a first party trust. There can be two different types of first party trusts: pooled or payback trusts. A qualifying first-party trust will exempt the beneficiary’s assets from consideration as it relates to public benefits.

Third Party Special Needs Trusts

This type of SNT is not funded with the beneficiary’s money – rather a third party contributes their funds to create the trust for the benefit of another person. Third party SNTs are the ideal form of SNT as the assets never belonged to the beneficiary and therefore there is no worry that the trust will somehow disqualify the beneficiary from the state aid they receive.

“Pooled” Special Needs Trusts

A “Pooled” type of trust is a first-party SNT that can be created for a beneficiary of any age pursuant to 42 U.S.C. 1396p(d)(4)(C). A “Pooled” SNT is managed by a nonprofit organization and combine the assets of many beneficiaries into one pool for management and investment purposes. A “Pooled” SNT will be treated as if it were a third-party SNT if the following rules are followed:

  • The trust is created by the beneficiary himself, by a third person, or by a nonprofit organization for a beneficiary who is disabled at the time of creation.
  • The assets of each beneficiary are held in separate accounts, but pooled for investment and management purposes by the nonprofit organization overseeing the SNT.
  • The trust may include a provision that Medicaid will receive any remaining amounts in the pooled account upon the beneficiary’s death as repayment for services Medicaid provided to the beneficiary. Alternatively, the trust can provide that any remaining funds may be used for the benefit of other pooled trust beneficiaries.

“Payback” Special Needs Trusts

The rules for the so-called “Payback” first-party SNT are governed by 42 U.S.C. 1396p(d)(4)(A). These rules allow a trust to be created within a safe harbor so the assets in the trust do not disqualify the beneficiary from eligibility of state aid. A “Payback” SNT is funded with the beneficiary’s own funds – such as when an injured person receives a settlement via a personal injury claim. A “Payback” SNT will get the benefits of a third-party trust SNT if:

  • The trust is created for a disabled beneficiary under age 65.
  • The trust is created for the sole benefit of the individual by the individual’s parent, grandparent, legal guardian or court. The beneficiary cannot create the trust for herself.
  • The trust includes a provision that Medicaid will receive any remaining amounts in the trust upon the beneficiary’s death as repayment for services Medicaid provided to the beneficiary.

Trust Design and Considerations

Careful consideration should be given to selecting the trustee of the trust. Generally it is advisable that an independent party serve as trustee – not a family member. The trustee will be responsible for investment of the funds, payment of taxes, accounting to the beneficiary (and possibly others such as various state agencies or the Social Security Administration), and making proper expenditures or distributions for the benefit of the disabled beneficiary.

Some families aren’t comfortable with the fact that a family member shouldn’t serve as trustee. In these cases, we can include a Trust Protector in the trust agreement. The Trust Protector can be a family member. The Trust Protector can retain the power to terminate a trustee who is not serving in a satisfactory manner. The Trust Protector may also be given authority to amend the SNT in certain circumstances, such as a change in state law.

Other Legal Considerations

Don’t forget to deal with any liens. When possible, it’s best to resolve any Medicaid or Medicare liens along with the terms of the settlement of the underlying case.

Third party SNTs do not require court approval if drafted and funded properly. However, when dealing with first-party SNTs where the beneficiary is a minor or an incapacitated adult then court approval is required in order to create the (d)(4)(A) trust and keep the assets exempt from consideration from qualification for public benefits. Court approval can be sought in the probate court or guardianship court, depending on whether or not the beneficiary is currently the ward of a guardianship.

Ongoing Trust Administration

The trust must have its own tax identification number. It is important that the trustee never use the beneficiary’s social security number when opening trust accounts and that they do not commingle the beneficiary’s earnings, savings or government benefits (such as his or her SSI or SSDI check) with trust money.

Generally, the trustee can invest the assets in the trust in any reasonably prudent manner. Unless there are specific restrictions drafted within the beneficiary’s trust, the trustee can invest the trust assets in any number of investments such as real estate, stock market investments, bonds, treasury notes, etc. However, the trustee should avoid making any risky investments that could result in the loss of the trust assets. Obviously, the goal should be to maximize the amount of income earned while providing sufficient funds to draw on during the year.

The trustee is also responsible for deciding when to make distributions from the trust for the benefit of the beneficiary. The trustee should not authorize support types of disbursements – most notably payments for food, clothing and shelter — as these may reduce the amount of SSI the beneficiary receives. Trustees should also be cautious about making cash distributions directly to the beneficiary for risk of that cash putting the beneficiary over the allowed amount of cash/assets for benefits qualification purposes. When possible, it is strongly preferred that the trustee make payments directly to service providers on behalf of the beneficiary.

Distributions that should not affect the beneficiary’s eligibility for state aid include payment for items such as medical services not covered by government programs, care givers (caution if the caregiver is a family member), personal care services (grooming, household cleaning, yard service, etc.), prepaid funeral expenses, internet service, television service, telephone service, professional services (accountant, attorney, etc. ), fitness club membership, entertainment, transportation, vacations and recreation. This list is not meant to be inclusive and trustees must carefully evaluate each and every distribution to ensure it won’t impact the beneficiary’s eligibility for the assistance they are entitled to under state law.

Consider Special Needs Trusts Early

Special needs trusts shouldn’t be an afterthought. Evaluate the potential need at the onset of your case. If you aren’t well versed with these trusts, but sure to help your client find a practitioner to assist with the drafting of the trust. Special needs trusts can be complicated, but you need to help your client navigate these issues to secure their future.

KRISTIN M. TYLER is an associate with Gordon Silver. Her practice is focused on estate planning, business formation, charitable giving, asset protection planning, probate and guardianship. She can be reached at (702) 796-5555 or