FAQ - Special Needs Trusts

SSDI and UTMA Accounts:

Question: Client's son is 20 years old with debilitating Cerebral Palsy. Son is in a wheelchair, cannot communicate, and has no ability to work. We have already gotten client a Limited Conservatorship over son.

Client has been applying for SSDI benefits. The SSDI office found a significant amount of assets in the son's name, consisting of an UTMA account. The UTMA account has a value of about $__________ depending on the stock market.

My question is what is the best method of addressing this account in a manner that will allow son to qualify for government benefits. It seems to me that you could just have the UTMA custodian ("client") purchase a specially equipped car (See Title XVI of the Social Security Act Section 2157) and use the remaining funds for the son's day to day living expenses, which are quite substantial. I think the value of a specially equipped car alone could liquidate 1/2 the account.

What would be the correct course here? Spend the assets down on exempt assets? D4a Trust? Any other ideas.

Answer: I have lots of thoughts - first of all you are likely trying to secure SSI, not SSDI. SSDI does not have asset or unearned income limits. Please confirm this - if Medicaid or SSI is not needed for support services then you do not need to do ANYTHING…

If SSI or Medicaid is needed, you have lots of options, and you could also use a variety of options. First of all, at 18, the parent is NOT legally obligated to provide support to son or services for free. Odds are that the family has been doing that. Go back and determine what the son would have been eligible for to assist with basic needs from SSI and services from Medicaid. Reimburse the family for any and all expenses they paid for. If reimbursed to family, it is not income to family. If services are paid to family, it is. Do it anyway. That money is now the money of the parents and they can use it to do whatever they need, like pay for legal fees, and/or fund create their own third party trust for their son.

They can then spend down; or create a d4A or d4C trust for their son. If anyone else in the family is disabled, you can use d4C trust quickly. Consider purchasing a van or assisting in development of a real home for this young man.

Hope this helps - please let us know how it works out.

Patricia E. Kefalas Dudek

Special Needs Trusts:

Question: I have a client who established a 529 plan for a minor disabled grandchild who will probably need SSI and Medicaid in the future. It is my understanding that while the client is the owner/custodian of the 529 plan, these plans may be considered a countable asset for SSI and Medicaid purposes. If this assumption is correct, does anyone have any suggestions as to how to deal with this asset - can a Supplemental Needs Trust hold a 529 plan - I understand that only an individual may be an owner or custodian. Any thoughts, suggestions, or comments would be greatly appreciated.

Answer: The trustee is the owner -- I have done this several times.

Patricia E. Kefalas Dudek

Special Needs Trust (d4A):

Question: I am the trustee of a special needs trust (d)(4)(A) for a minor. The family received SSI payments for the minor for two years prior to the establishment of the snt. After the SNT was established, the family was advised that they had misrepresented their assets to SSA and that they received $15,000 too much in SSI payments. Family has no money to make restitution to SSA and has requested that the funds come out of the SNT. Any one care to offer an opinion on this? Were the SSI payments for the sole benefit of the child such that the repayment or restitution of the funds to SSA is also for the benefit of the child?

Answer: Good Question. I have done this for an adult before when they made a "mistake" about reporting. What about negotiating a reduction in SSI to pay the overpayment over time? That way the trust can pay for other items to make up the short fall and it is a bit cleaner that the payments going out are for the sole benefit of the beneficiary. I am assuming that the parents were acting as rep. payee? If they are uncollectible, do they worry about SSA removing them as rep. payee? There is no obligation for the Trustee to do this, but you have to look at all the facts. If there is enough money to make it worth it, petition the court for approval and a finding that it is in the sole benefit of the beneficiary as the SSI was to be used exclusively for them. Give notice to the SSA of the hearing.

Patricia E. Kefalas Dudek

3rd Party Special Needs Trust:

Question: Is it necessary to report the existence or creation of a 3rd Party SNT to the Social Security Administration? Does the answer to that question depend on any of the following?:
  -whether the beneficiary of the SNT is over 18
  -whether the beneficiary is receiving SSI
  -whether the trust is revocable or irrevocable
  -whether the trust is funded or unfunded
  -or any other factors?

Answer: Keep in mind that many times a 3rd Party SNT is funded upon the death of the person's parent. Often that means the beneficiary may change from SSI to SSDI and then Medicaid from the state agency. Therefore, you need to notify whichever agency the person gets their Medicaid from - either SSA or the state Medicaid agency. Our state agency is hit-and-miss about reviewing administration of the trusts (.ie., the disbursements), but the trustee should be ready to respond if they ever ask to see the disbursements (or if the person is on SSI, if SSA asks). For the record, there have been lots of folks that have lost their jobs at these agencies locally, so we are seeing a decrease in this right now... but it could change any minute and you need to warn your clients (the trustees) to be ready for that.

Patricia E. Kefalas Dudek

3rd Party Irrevocable Trust:

Question: What is the most efficient income tax way to fund a 3rd Party Irrevocable Trust (one we created for our daughter) while we are still alive?

Answer: The main issue with putting money in the irrevocable 3rd party special needs trust now is that the money would be taxed at an accelerated rate because the trust is irrevocable. I prefer to use the irrevocable trust because it makes it easier to deal with governmental agencies. However, to assure you are not paying more in income taxes I recommend you do one of the following:

1. Open an investment account in your name and put the money in there. Have a pay-on-death provision that names the special needs trust to be paid upon your death. (This is my top recommendation.)

2. Put the money in a 529 education plan which is held by the trustee where the money will grow tax free. (Below are links to two articles about 529 plans:

College Planning Q&A: 529s and Financial Aid
College Planning Q&A: 529s as IRA Beneficiaries

3. Invest the money in tax free municipal bonds.

4. Get a second to die life insurance policy which names the trust as beneficiary.

For more information on how to fund a special needs trust in an income tax efficient matter check out the following articles:

Funding a Special Needs Trust: How Much is Enough?

Financially Preparing for Special-Needs Kids

Please note: A transfer to a 3rd party special needs trust does not qualify as a gift for income tax purposes and reduces the parents' unified credit.

Patricia E. Kefalas Dudek