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Special Needs Trusts FAQs « FAQs

We are teachers and advocates, and as a part of that process we frequently answer questions from our clients — so we started collecting our Frequently Asked Questions. We are collecting and sharing them with you by topic and hope these are helpful to you.

Please feel free to email Patti at pdudek@pekdadvocacy.com if you have a follow up question or comment. We'd also like you to let us know what you think of this new feature of our website.

KEEP IN MIND THESE ARE GENERAL QUESTIONS AND CANNOT BE CONSIDERED LEGAL ADVICE OR THE BEGINNING OF THE ATTORNEY-CLIENT RELATIONSHIP.

We have redacted names to protect the innocent! Sometimes they are posed in a give and take format because they were developed through an email exchange.

(Note: questions are not edited for spelling, grammar or content.)

FAQs (Misc.):

Question: What do SSI and Medicaid cover? How is that different from a special needs trust?

Answer: SSI – or Supplemental Security Income – is a federal supplement program (administered by the Social Security Administration) for people with assets below $2000 and little or no income who are disabled and/or elderly. SSI helps pay for basic needs, such as food, clothing and shelter.

Medicaid is the federal program that provides for health care coverage.

With food, clothing, shelter and health care covered by these public benefits, a special needs trust is a private fund set up to pay for life’s “extras”; managed by a trustee of your choosing, it’s used to enhance the lifetime of someone with disabilities, providing for a variety of supplemental goods and services to help the beneficiary, such as: wheelchairs, handicap-accessible vehicles, mechanical beds, personal attendants, recreational and cultural activities, as well as the purchase of a home – comforts that are not readily available.

 

Question: There is more than one type of special needs trust. What are they and how are they different?

Answer: A person with special needs can have either a first-party trust or a third-party trust.

A first-party trust is also known by a few other names: payback trust; self-settled trust; or D4A trust, after the section of federal law establishing it.

first-party special needs trust is funded by the beneficiary’s money – a personal injury settlement, inheritance, alimony, etc. If a disabled person receives a lump sum such as this, it disqualifies the person for public benefits (e.g., SSI and Medicaid) now and in the future, since it is an increase in assets. Setting up a first-party special needs trust enables the beneficiary to retain the additional finances in this life-enhancing trust.

A third-party special needs trust is funded by someone other than the beneficiary – gifts/inheritances from a parent, grandparent, other family member or friend. Here, public benefits are not jeopardized, and gifts into the trust can be made throughout the beneficiary’s life. Friends and family can even name this type of special needs trust in their will, thereby contributing additional funds at their death.

 

Question: If I set up a special needs trust for my child, can he/she take money out of it?

Answer: No. If you set up a trust for your child (a third-party trust), your child cannot direct how the money is spent. Your chosen trustee oversees management of the trust. If your child had access, he or she would be disqualified from do to the receiving public benefits due to the assets limits.

 

Question: What is the role of the trustee? How do I choose one?

Answers: A trustee is responsible for managing, investing and distributing trust funds. Whoever you choose must always be mindful of the beneficiary’s special needs and best interests, reliably acting as a genuine advocate. Furthermore, the trustee should not only be someone who is skilled at managing finances and making wise investments, but also keeping proper records and making permissible distributions with trust funds. Improper distributions may reduce or terminate public benefits.

Charitable Gifts/Donations:

  • Question:  A friend of mine is very sick. A couple of friends are hosting a fundraiser for him to help pay for medical expenses.  Some people have already sent some money. His wife asked me how she should handle it. Should she open a separate bank account or deposit it in their existing account?
  • Answer:  How she handles this will likely be determined by lots of other things happening. For example, do the folks expect and/or need a tax deduction? If so, they may not get one because a charitable gift made to a particular individual will cause problems for a public charity. If they need Medicaid, you may want to consider this in the concept of Medicaid planning and create a special needs trust. Hope this helps and I am sending get well wishes to your friend.  Patti Dudek

Government Benefits and Special Needs Trusts:

  • Question:  A disabled adult received an inheritance.  The disabled adult does not receive Medicaid or SSI, but rather receives Social Security from a deceased parent and Medicare benefits.  The attorney for the disabled adult has suggested establishing a special needs, payback trust for the inherited money. 

    Since there are no government benefits received by the disabled adult that would require a special needs trust, is there any reason why a special needs trust would be advisable? 

  • Answer:  Yes, they may need them in the future. Do they have gap insurance? Are you sure they are not getting any type of community based Medicaid services or food stamps? Do they need other long term care services in the community?

    That will help you make the decision. If you can afford gap insurance and there is no need for long term care services or mental health services, you may not need it.  If you need someone to manage the money, it does not hurt to use D4A trust or C trust if there is a risk their needs may change, but you can always do it later if you need it as well, as there is not a penalty period.  Patti

SSI and Special Needs Trusts:

  • Question:  I have a client whose adult son receives SSI benefits.  Mother plans to purchase a house jointly with her son, where he will reside alone. He does not have enough benefits to pay for the entire mortgage  and utilities. My question is whether or not mother can pay half of the mortgage payment as she is one half owner,  with her son paying the other half and all utilities, or will this be deemed a payment for his support and thus income?  Or would it be better to put the house in his name alone and have him pay all of the mortgage and she pay the utilities?  I think payment of utilities is also deemed support. Mom wants to help but doesn’t want to have his benefits affected.
     
  •  Answer:  It would be easier to have her own it and put it in a trust. Then have her son pay rent to the trust with a rental agreement. That way SSI will not be reduced for her paying for in kind support. The trust can continue to own it (if drafted correctly) after mom dies and maintain the situation for him. There is a provision in the property tax code that allows a trust that is for the benefit of a beneficiary with a disability to qualify as a person for the homestead. The beneficiary  of the SNT is considered the owner of the property for purposes of the homestead exemption pursuant to MCL 211.7dd (vii):  “The sole present beneficiary of a trust if the trust purchased or acquired the property as a principal residence for the sole present beneficiary of the trust, and the sole present beneficiary of the trust is totally and permanently disabled. As used in this subparagraph, "totally and permanently disabled" means disability as defined in section 216 of title II of the social security act, 42 USC 416, without regard as to whether the sole present beneficiary of the trust has reached the age of retirement.”

    Hope this helps.  Patti


  • Question:  We have a client who is receiving SSI and Medi-Cal and her 3rd party SNT has been paying for private health insurance premiums for years.  She recently read something which has made her alarmed about having and paying for additional insurance through the SNT – she's a quadriplegic and would probably be dead if it weren't for this insurance coverage.  She's got a review with SSI scheduled, and she's alarmed about this issue – as far as I know, it's not a cause for concern, but can anyone let me know if this is an issue?

    Answer:  Not an issue that I am aware of. I have only had corporate trustees question if it violated the terms of the trust because they see Medicaid as only health insurance and that we were paying for something that was free. When I explained that Medicaid was used primarily for long term services and supports and that specialist acute care providers will not accept Medicaid (especially since we have moved to managed care) I did not see it as a duplication and/or violation of the terms of trust. Many clients will also address this specifically in their Letter of Intent for more back up (or their joinder agreement for a pooled trust). Hope this is helpful.

Hope this helps.  Patti

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.  Patti

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.  Patti

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.  Patti

Child Support Obligations:

  • Question: Can the trustee of a SNT pay the child support obligations of the beneficiary of that trust?

    Answer: From Kevin Urbatsch: Here is what CEB's Special Needs Trust book says on the subject:

    The payment of support to a spouse, domestic partner, or child may interfere with public benefits as a violation of the "sole benefit" rule. The Social Security Administration's POMS lays out the meaning of "sole benefit." POMS SI 01120.201(F). It says that no one but the beneficiary may benefit during the beneficiary's life. See §§9.12-9.13 for a thorough discussion of the "sole benefit rule" for first party SNTs.

    The best way to pay a support order is to use the SNT beneficiary's government aid, rather than the assets of the SNT created for the beneficiary's benefit. The first party SNT can then be used to pay for things that otherwise would have been paid for by public benefit programs. If that is not possible (e.g., because there is not enough money), the "sole benefit" language for first party SNTs suggest that former spouses, registered domestic partners, and children of divorced parents should not benefit from a first party SNT. Arguably, the use of SNT funds to pay a support payment to a child, spouse, or domestic partner (as long as subject to court order) could presumably be considered for the sole benefit of the SNT beneficiary by construing the payment as the discharge of a valid legal obligation of the beneficiary. There is also a chance that the beneficiary's failure to pay a support order will result in contempt of court (and possible jail time). Avoiding a contempt of court charge and jail time is certainly providing a direct benefit to the beneficiary. However, the SNT trustee's safest course is to file a Prob C §17200 petition for instructions. The trustee should make sure that the Department of Health Care Services (DHCS) is noticed and that the child's interests are protected by a custodial parent or guardian ad litem.

    For further development of the argument that the "sole benefit" rule is not violated by payments of child support from an SNT, see the article by David Lilliesand, Esq., Thoughts on Supporting Healthy Dependents Using Funds From a Disabled Parent's or Spouse's Special Needs Trust.

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.  Patti

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?  (Specialneedsanswers.com)  As a parent or guardian, you want to ensure that your child with special needs will remain financially secure even when you are no longer there to provide support.

    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.  Patti