Special Needs Trusts – A Great Solution to Supplementing Government Assistance for Disabled Persons

I.  Introduction.

Individuals with disabilities present a unique set of challenges for parents and other family members.  Depending upon the particular disability, families often grapple with such issues as guardianship, medical care, financial planning for lifetime care as well as meaningful job opportunities to provide fulfillment and independence.  For example, my mentally-challenged 58 year old cousin lives with a small group of other disabled individuals in a home owned by my aunt and uncle.  They have around the clock supervision.  These living expenses are paid by the state.  She has a job, one in which she excels and has had for several years.  Her extensive family provides support, love and encouragement to her daily.  Nevertheless, she, as well as all disabled persons, has continuing financial needs, many of which are provided by government programs.  But many of her financial needs are not paid by state programs and her parents provide funding to meet those needs.  Her parents are successful retired business owners who want to ensure that she has the financial support she needs.  Not surprisingly, this cousin immediately comes to mind when I consider the topic discussed here.  My cousin’s story (and that of her family) is common, if not typical. 

Proper planning for disabled persons[1] (“DPs”) requires an understanding of frequently-changing and often complex federal and state laws and regulations, including Social Security regulations.  Families struggle with the dilemma of providing the financial resources necessary to ensure a lifetime of comfort and security for the DP without losing government entitlement benefits.  It is with this objective in mind that Special Needs Trusts cry out for consideration.  These trusts are often referred to more descriptively as Supplemental Needs Trusts and referred to in the article as “SNTs”. 

The purpose of this article is to generally describe the nature, benefits and types of SNTs.  The discussion will focus on the use of these trusts in Illinois.  However, the concepts are generally similar throughout the fifty states.

 

II.   Why use a Special Needs Trust?

Pure “entitlement benefits,” including SSDI (Social Security Disability Insurance) and Medicare, based upon the prior work record of a disabled person or, his or her parent.

These benefits do not have income or asset limitations. Virtually all other public benefits are available only if the DP demonstrates that she does not have the financial means to care for herself financially.  These financial eligibility rules disqualify applicants who have assets and income available to them to meet their basic needs for food and shelter.  Effectively, these government programs limit the number of eligible recipients by imposing financial eligibility rules.  If the government determines that a DP has sufficient income or assets available to them, public benefits are lost.  

A traditional trust places assets in the control of a trustee who then is directed to provide for the needs of the beneficiary, often granting the trustee wide discretion in accessing not only the income of the trust, but also the assets (principal) of the trust as needs of the beneficiary arise.  Even though discretion lies in the hands of a third party trustee of a traditional trust, the assets and income are “deemed” available to the beneficiary under the means tests and are considered by the agencies in determining eligibility.

The primary purpose of SNTs is to protect the DP’s entitlement to certain government benefits while providing a fund for a DP that will enhance his or her quality of life.   Such government benefits may include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, subsidized housing, and other benefits based upon need. For purposes of an SNT, an individual is considered impoverished if his or her personal assets are less than $2,000.  

III.  Legal Evolution.  – The Options have Improved.

Historically, parents of DPs had only two choices. They could leave assets directly to the child or to a traditional health, support, and education trust for the child’s benefit, in which case the child would be disqualified from SSI and Medicaid until those assets were exhausted. Alternatively, in the hope of preserving government benefits, parents could  leave assets to a sibling of the DP or another close family member or friend, with the hope that the recipient would use those assets for the child’s benefit. Unscrupulous behavior and unanticipated financial crises befalling the chosen custodian often resulted in diminished or depleted funds for the DP.

Decades ago, SNTs were developed by lawyers who realized that if the terms of the trust make the trust estate unavailable for basic needs such as food and shelter, the assets of the trust should not disqualify the DP from receiving the needs-based entitlements.  These trusts were challenged and a body of case law developed. 

Then in 1993, Congress created an exception under the amendments to the Omnibus Budget and Reconciliation Act (OBRA-93) which specifically authorized the use of Supplemental Needs Trusts for the benefit of disabled individuals who are under the age of 65 years at the time the trust is established and funded according to Social Security standards.  Shortly thereafter, SNTs were recognized explicitly under Illinois law.  In Illinois, these trusts are referred to as “Section 15.1” trusts.  If drafted properly,  SNTs can be a very effective tool to not only maintain benefits eligibility, but also to bring enjoyment and new, positive experiences to the beneficiary.  

III.  Government Benefits.  – What is At Stake?

As noted previously, government benefits for the disabled can be divided into two categories.  Medicaid and Supplemental Security Income (traditional “Social Security”) are “needs-based” benefits and are only available to low-asset/low-income DPs. On the contrary, Social Security Disability Insurance and Medicare are “entitlement” benefits, based upon prior work history of the DP or his parents and such benefits do not have asset limitations

Below is a quick summary of the two primary needs based programs affecting most DPs.  This overview is not intended to provide comprehensive details on eligibility rules for the programs, but rather to identify their general characteristics for basic SNT planning purposes. -+

  a. Supplemental Security Income (“SSI”).

• A federal program of cash assistance for aged, blind, or disabled individuals who have little income and few assets.
• Eligibility depends upon status (age, disability, etc.) and financial need,but is not related to an individual’s work history (i.e., an individual need not have “paid into the system” in order to qualify).
• The SSI program provides monthly checks from the federal government of up to $773 for an individual, and up to $1100 for a married couple, reduced by “countable income”.
• Must have “countable resources (net worth) of less than $2,000 for an individual and $3,000 for a married couple

  b. Medicaid.

• Medicaid is a joint federal-state program of medical assistance. Medicaid is not a single program, but rather, a group of programs, each of which has unique benefits, rules, and eligibility requirements.
• As with SSI, eligibility for Medicaid is based upon financial need (low income and assets).
• Unlike SSI, however, Medicaid does not provide cash benefits to beneficiaries. Rather, Medicaid pays for a variety of health care and long-term care services. 

IV.  Special Needs Trusts – The Basic Rules.

Provided the rules set forth below are followed, the assets of the SNT will not be “countable assets” for purposes of determining Medicaid and SSI benefits.  These assets and the income they produce will be available to provide for needs that “supplement” needs beyond those government benefits.   

a.  Separate Legal Entity.  Each Supplemental Needs Trust is its own "entity" with its own Federal (Employer) Identification Number issued by the Internal Revenue Service. The Trust is not registered under either the Grantor's or the Beneficiary's Social Security Numbers.

b.  Must be Irrevocable.  SNTs must be irrevocable. A properly-drafted Trust will include provisions for Trust termination or dissolution under certain circumstances, and will include explicit directions for amendment when necessary.

c.  Stand-Alone.  The SNT is  designed to benefit an individual who has a disability. A Supplemental Needs Trust is most often a “stand alone” document, but it can be included as part of a Last Will and Testament. Supplemental.

d.  One Beneficiary Only.  There must be a separate document for each intended beneficiary.

e.  Supplemental Needs.  A Supplemental Needs Trust provides for supplemental and extra care over and above that which the government provides.  Payments made directly from the trustee to the provider of goods or services, generally will not affect public benefits if used for:

Automobile or van used to transport child, including gas, maintenance, insurance, and adaptable equipment; Books, compact discs, and DVDs; Cable or satellite television; Case management and advocacy services; Classes and lessons; Clothing; Club memberships; College tuition; Companion for outings or vacations; Computer, including internet service, software, training, and adaptive technology; Dental expenses not covered by Medicaid or private insurance; Electronics, including television, DVD, and CD players; Entertainment, including concerts, movies, theater, and sporting events; Eyeglasses if not covered by Medicaid or private insurance; Furniture; Haircuts, manicures, pedicures, salon and personal grooming services; Health insurance premiums for private insurance; Hearing aids and batteries; Hobby supplies and sporting goods; Home repairs and modifications to home (i.e. wheelchair accessibility); Household supplies (non-food), including cleaning supplies, paper products, and personal care products; Job coach; Laundry and dry cleaning; Linens; Medical treatment, drugs, and devices not covered by Medicaid or private insurance; Personal care attendant not covered by Medicaid or private insurance; Prepaid funeral contracts; Private hospital or nursing home room if not covered by Medicaid or private insurance; Therapy not covered by Medicaid or private insurance (including rehabilitation, speech, physical, occupational, music, and art); Telephone and cell phone; Transportation expenses (including expenses of others to visit child); Vacations

f.   Is a Payback Required? 

     1.Third Party Trusts.  Third party created trusts are trusts created by someone other than the DP, usually parents, grandparents or siblings of the      DP and funded with assets not owned by the DP.  For these trusts, there is no obligation upon the death of the DP to repay benefits the DP            received during his lifetime, either from SSI or under the Medicaid program.  These trusts in Illinois are referred to as “Section 15.1” trusts.

     2.  Supplemental Needs Payback Trust.  When the property of the DP is used to fund the SNT, the rules change.  It is sometimes confusing              because these trusts are known interchangeably as “First Party Trusts”, “OBRA 93 Trusts” and “Supplemental Needs Payback Trusts”, depending        upon who you might be talking to.  Regardless of the nomenclature, if the trust is funded with assets owned by the DP, the payback rules below      apply:

      Provided the trust is created prior to the DP reaching age 65 (and all of the rules in Sections (a) – (h) of this Section IV are followed), the             assets of the “Payback Trust” are not “countable” and thus do not disqualify the DP from receiving SSI or Medicaid benefits.  Unlike assets             remaining in a Third Party Trust, assets that remain in an OBRA 93 Trust after the death of the DP must first be paid to reimburse or                     “payback” the Medicaid and other state expenditures.  Funds remaining after that “payback can be distributed or used for the successor                   beneficiaries of the trust.

g.  Trustee.  The DP may not be the trustee.  The DP may have no authority to direct distributions from the Trust in any way.  Other than those rules, anyone may serve as the trustee.  Typically, the parent or grandparent will serve as the trustee and successor trustee.  Thereafter, successors are typically siblings or trust companies. 

h.  Distribution of Assets at the Death of the DP.  The assets remaining in a SNT after the death of the DP may be distributed to successor beneficiaries including any person or charity.  As noted above, if the SNT is a Payback Trust, the distribution to successor beneficiaries of the trust can only be done after first repaying amounts paid under state Medicaid programs. 

 

V.  Summary.

Special Needs Trusts are outstanding vehicles for protecting a DP’s access to government benefits while significantly improving their quality of life.  As you can see from the information presented above, the proper creation of the SNT is critical and you should consult --- or you should suggest that your attorney consult --- an attorney with experience in creating SNTs.  We recommend that your SNT be coordinated with your overall estate plan.  We can help you or your attorney navigate these intricacies by drafting the appropriate documents allowing you to provide for your special needs child or family member.

 

You’re Invited to Call or E-mail. 

“If you have questions about owning and operating a business, and the many financial

and liability risks that you face today, please send your e-mail to

[email protected] or call me at 618.639.0461.

I’ll be happy to help you in every way.” -- Jeff 

 

Jeffrey D. Roberts, Attorney at Law w CPA w Entrepreneur,  300 Commerce, Jerseyville, IL  tel. 618-639-0461 or 2410 State St., Alton, IL 62002  tel. 618-466-2782 

Jeff Roberts, Attorney and CPA, is the founder of RobertsLaw, with offices in Jerseyville and Alton, IL.  RobertsLaw focuses on planning:  estate and elder planning and probate, entrepreneur and corporate business planning;  and transition planning for farmers and business owners looking to sell to outside parties or hand over the reins to family or trusted employees.