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Estate Planning: Special Needs Trusts |
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The Bailey Law Firm is experienced in preparing Special Needs Trusts for disabled beneficiaries. |
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| Definition and Purpose |
The Special Needs Trust or SNT is a type of trust created for the supplemental benefit of a disabled beneficiary. The SNT is a specialized trust agreement or document which should be drafted by an attorney with specific experience and knowledge in the areas of estate planning, trusts, disability planning, elder law, and governmental benefits. The SNT, if properly drafted and administered, permits the beneficiary to receive gifts from family members, an inheritance, or a personal injury settlement, and to continue to receive government benefits after the gift, inheritance or settlement.
The primary purposes of the SNT are: (a) to protect a disabled beneficiary from creditors; (b) to ensure that the disabled beneficiary continues to receive governmental benefits; and (c) to provide additional funds to the disabled beneficiary for needs not covered by governmental benefits. |
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| Government Benefits |
Some government benefits are needs-based or means-tested. In other words, a person has to qualify financially to be eligible to receive the benefit.
Examples of needs-based public benefits include: SSI (Supplemental Security Income), Medicaid/TennCare, Food Stamps, Low Income Home Energy Assistance Program, and HUD Section 8 Housing Vouchers. Examples of public benefits which are NOT need-based include: Medicare, Social Security Disability Insurance (SSDI), and Workers Compensation.
SSI is a federally administered program which provides funds for needy, aged (over 65), blind, and disabled persons. Persons qualify for SSI if such person's income is less than $1,331 per month (2007). The maximum monthly SSI benefit which can be paid to an individual recipient is $623 (2007).
Medicaid is joint federal and state government program which provides medical assistance to needy persons. Persons must qualify based on medical, resource and income criteria. In Tennessee, Medicaid has been replaced with TennCare-Medicaid. The Tennessee Department of Finance and Administration, Bureau of TennCare, administers the TennCare program and contracts with the Department of Human Services to determine eligibility for the program.
If a disabled person is receiving means-tested government benefits such as SSI or Medicaid, then the receipt of a gift, an inheritance or a personal injury settlement or award may disqualify the disabled person from receiving the benefits.
Certain resources are exempt or non-countable when determining whether or not the disabled person qualifies for government benefits. Examples of such non-countable resources include: a home; a motor vehicle; personal effects and household goods; and a burial or cemetery plot.
Furthermore, the assets of certain trusts of which the disabled person is a beneficiary are non-countable resources when determining whether or not the disabled person qualifies for means-tested government benefits.
One such trust is the SNT. The SNT's principal or corpus is not considered an asset or resource available to the beneficiary for purposes of qualifying for needs-based government benefit programs. Furthermore, the SNT's income is also not attributed to the beneficiary for purposes of financially qualifying for means-tested government benefits. |
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| Parties to a Special Needs Trust |
Parties to a Trust: Grantor
The grantor (or person creating the trust) of an SNT may be a family member, a court or the disabled beneficiary.
Parties to a Trust: Trustee
The trustees of an SNT can be: individuals such as parents, siblings, other trusted family members, and friends; professional advisors such as attorneys and accountants; or corporations such as financial institutions with trust powers and trust companies.
When selecting a trustee of an SNT, considerations should include: (a) attentiveness of the trustee to the beneficiary's needs; (b) any conflicts of interest between the trustee and the beneficiary; (c) tax implications of the situs of the trust; (d) the fees and costs charged by the trustee, if any; (e) possibility that individual selected could experience significant life changes such as divorce, relocation, etc.; (f) the business or financial management experience of the trustee; and (g) the special needs experience of the trustee.
Due to the nature of an SNT, the trustee of an SNT should be granted certain specific, special powers which may not be customary in a trust for competent beneficiaries. Such special powers may include: (a) absolute, unfettered and sole discretion to make any distribution; (b) power to seek advice from a legal or financial professional or professionals in the area(s) of special needs planning, estate planning and/or governmental programs so that the trustee(s) may effectuate the intent of the SNT; (c) power to purchase a primary residence or home for the beneficiary; (d) power to purchase a handicap vehicle for the necessary transportation of the beneficiary; (e) power to purchase a pre-paid burial policy for the beneficiary; (f) power to engage a legal advocate for the beneficiary in legal matters, including but not limited to representation before governmental authorities in determining eligibility for government benefits; (g) power to initiate any action to render the beneficiary eligible for any government benefits and/or to initiate either administrative or judicial proceedings, or both, for the purpose of determining eligibility of the beneficiary for government benefits; and (h) power to amend the trust instrument if the amendment is necessary to conform the trust instrument to new or applicable federal or state tax and/or trust laws or regulations, specifically including any laws or regulations relating to any state medicaid or medical assistance rules.
Parties to a Trust: SNT Beneficiaries
The beneficiaries of an SNT must be disabled, and may be adults or minors.
Examples of the types of beneficiaries of an SNT are: (a) a disabled minor child with Autism or Down Syndrome; (b) a disabled plaintiff who is receiving a personal injury settlement or court award due to an automobile accident or medical malpractice claim; and (c) a disabled spouse who requires skilled nursing care due to illness and advanced age. |
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| Types of Special Needs Trusts |
Types of Trusts: Self-Settled or Third-Party Created
The SNT may be self-settled or third-party created.
A self-settled trust is a trust created for the benefit of a beneficiary by the beneficiary or a person other than the beneficiary, and then funded with the assets of the beneficiary. A third-party created trust is a trust created for the benefit of a beneficiary by a person other than the beneficiary and then funded with the assets of a person other than the beneficiary.
Examples of third-party created trusts are: (a) an SNT established by a non-disabled spouse with the non-disabled spouse's assets for the benefit of a disabled spouse who requires skilled nursing care due to illness and advanced age; and (b) an SNT established by a parent with the parent's assets for the benefit of a disabled child.
An example of a self-settled trust is a D4A SNT.
The D4A SNT, named for the code section in which it is referenced, is a trust sanctioned by federal law in which a disabled plaintiff can place his or her own money - the plaintiff's personal injury settlement or award - and still qualify for means-tested government benefits. (See 42 U.S.C. ﾧ 1396p(d)(4)(A)).
In order for the D4A SNT to be effective, the following requirements must be met:
(1) the plaintiff must be under age 65;
(2) the plaintiff must be disabled;
(3) the trust must be created by a parent, a grandparent, a legal guardian or the court;
(4) the trust must contain a payback provision by which the government is repaid form the remaining trust funds at the plaintiff's death for the value of any public benefits received by the plaintiff during the plaintiff's lifetime;
(5) the trust must be for the sole benefit of the plaintiff; and
(6) the trust must be irrevocable.
Types of Trusts: Inter-Vivos vs Testamentary
The SNT may be inter-vivos or testamentary.
An inter-vivos trust is a trust established by a "grantor" (person creating the trust) during the grantor's lifetime (or while the grantor is alive). A testamentary trust is a trust established by a Last Will and Testament or other written instrument upon, or at the time of, the death of the testator (person creating the Will).
An example of an inter-vivos trust is an SNT established by a parent during the parent's lifetime for the benefit of a disabled child and then funded by the parent making annual gifts to the SNT.
An example of a testamentary trust is an SNT established by a parent at the parent's death for the benefit of a disabled child and then funded upon the death of the parent with the parent's probate assets.
Types of Trusts: Discretionary vs Mandatory
A trust can be discretionary or non-discretionary (mandatory).
A discretionary trust is a trust in which the trustee is granted the unrestricted freedom to choose the timing, frequency and amounts (if any) of distributions of principal and income from the trust to a beneficiary. A mandatory trust is a trust in which the trustee is directed or instructed to make certain distributions of principal and/or income upon the occurrence of certain events such as graduation or marriage or upon the attainment of a certain age. Trust distribution provisions may combine discretionary and mandatory distributions.
The SNT must be discretionary, and cannot be mandatory. However, the discretion is limited or restricted. The SNT directs the trustee to distribute the income and principal of the SNT ONLY for the non-support needs and supplemental care of the beneficiary. The beneficiary's basic needs such as food, shelter and health care are to be provided by sources other than the SNT, specifically by government or public benefit programs.
Types of Trusts: Irrevocable vs Revocable
Trusts can be irrevocable or revocable.
An irrevocable trust is a trust which cannot be amended by the grantor, yet may be amended by the trustee and/or beneficiaries and the Court. A revocable trust is a trust which may be amended and/or revoked by the grantor. Such amendment or revocation may require the consent of the trustee, dependent upon the terms of the trust agreement.
The SNT must be irrevocable and cannot be amended by the disabled beneficiary. |
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