Beyond Safety Nets: Navigating the World of Special Needs Trusts

Special Needs Trusts (SNTs) are a specific type of trust designed to safeguard the eligibility of beneficiaries for need-based government benefits, such as Medicaid and Supplemental Security Income (SSI). These trusts are also known as supplemental needs trusts or "(d)(4)(A)" trusts, named after the corresponding federal law, 42 U.S.C. § 1396p(d)(4)(A). Individuals who meet the disability criteria set by the Social Security Administration can utilize SNTs to maintain their eligibility for benefits programs since the assets within the trust are not considered owned by the beneficiary. In other words, if an individual with disabilities has more than $2,000 in their own name, they might not qualify for SSI or Medicaid. However, the government allows eligibility for SSI and Medicaid if the individual places assets exceeding $2,000 into an SNT.

What can an SNT be used for?

As the name suggests, an SNT isn't intended for basic support, but rather for covering expenses not paid for by public or private benefit programs. SNTs encompass various expenses, including medical and dental costs, necessary equipment like accessible vans, specialized education, insurance, and transportation. With adequate funding, the trustee may also invest in quality-of-life enhancements such as electronic devices, vacations, and companionship, aimed to boost the beneficiary's overall well-being. In addition, trustees have the discretion to allocate funds for other needs if it's deemed beneficial for the beneficiary.

While understanding the permitted uses of SNTs is critical, it's equally essential to understand their limitations and what they cannot be used for. SNTs cannot be used to pay for groceries, rent/mortgage payments, property taxes, or utilities. This is because housing and food are considered basic needs under Social Security laws. Trustees should typically never give an SSI or Medicaid beneficiary cash or a cash equivalent (such as gift cards). Doing so could result in a possible loss or reduction in public assistance.

What are the different types of SNTs?

SNTs come in three forms: first-party trusts, third-party trusts, and pooled trusts, all designed with the disabled individual as the beneficiary.

First-party SNTs contain assets owned by the individual with special needs, such as an inheritance, gift, or settlement from an accident. A drawback associated with first-party SNTs is the payback provision. This provision is a requirement mandated by federal law which stipulates that, upon the death of the beneficiary, any remaining funds in the trust must first be used to reimburse the government for Medicaid benefits that were provided to the beneficiary during

their lifetime. This provision ensures that Medicaid is repaid for the expenses it covered on behalf of the beneficiary before any remaining funds can be distributed to other beneficiaries or heirs.

Third-party SNTs hold funds contributed by individuals other than the beneficiary, such as family members or friends, who wish to support their loved one with disabilities. Third-party trusts can be established during the grantor's lifetime (inter-vivos) or through their will (testamentary). These trusts have the flexibility to hold various assets owned by family members or other individuals, including real estate, stocks, bonds, and other investments. Similar to first-party trusts, third-party trusts allow assets held within them to remain separate from the beneficiary's own resources, ensuring continued eligibility for SSI or Medicaid benefits. However, unlike first-party trusts, third-party trusts don’t include the payback provision requirement. This absence of a payback provision means that, upon the beneficiary's passing, any remaining funds in the trust can be distributed to other family members or charitable organizations without the requirement to reimburse the government.

In a pooled trust, funds from multiple disabled individuals are pooled together for the benefit of each beneficiary. While each person's account is maintained separately, the assets are collectively invested and managed by the trustee of the pooled trust. Pooled trusts are established by non-profit organizations and can be either first-party or third-party funded. Individuals with disabilities frequently opt for a pooled trust when they lack someone to establish an individual first-party SNT on their behalf, necessitating the transfer of funds out of their name to qualify for or maintain government benefits. Moreover, some individuals value the communal aspect of pooled trusts, knowing that their contributions will benefit others with special needs.

By utilizing these trusts, beneficiaries can preserve their benefits while still accessing the trust funds as needed. It’s important to remember that for first-party SNTs and pooled trusts, the trust must be established and funded before the individual turns 65 years old (although for pooled trusts, the rules vary state by state).

What are the requirements of an SNT?

An SNT is an irrevocable trust. This means that once the trust is established, the terms generally cannot be changed by the grantor (the person who establishes the trust). By doing so, the assets placed into the trust are no longer considered the property of the grantor. They are managed by a trustee for the benefit of the trust's beneficiary, who is typically an individual with disabilities. By making the trust irrevocable, it helps safeguard the assets for the beneficiary's benefit and prevents them from being counted as resources for government benefits.

Other requirements include the trust being funded before the beneficiary turns 65 (unless the trust is third-party), the trust being for the sole benefit of the beneficiary, and the beneficiary being disabled under 42 U.S.C. § 1382c(a)(3). An individual is deemed disabled under 42 U.S.C. § 1382c(a)(3) if they are unable to participate in significant gainful activity due to a medically verifiable physical or mental impairment expected to result in death or lasting for at least twelve continuous months. For individuals under 18, disability is established if they experience a medically verifiable physical or mental impairment of comparable severity.

What does a trustee of an SNT do?

Aside from establishing a trust with special provisions, selecting a trustee is critical. The trustee could be an individual or corporation. Most often, people choose a family member, a reputable attorney, or a financial institution. When choosing a family member, it is important to pick someone who is trustworthy, reliable, and intelligent. Overall, the trustee will be responsible for overseeing the trust's management.

Managing an SNT is a substantial undertaking accompanied by significant responsibilities. Trustees bear the responsibility of investing prudently, ensuring tax compliance, and adhering to all regulations concerning Medicaid or other means-tested government benefits. Additionally, trustees may enlist the expertise of accountants, attorneys, financial advisors, and other professionals to assist in managing the trust effectively. Trustee responsibilities also include disbursing funds to the beneficiary according to predetermined schedules or as needed. Furthermore, it's wise to designate at least one backup trustee. This ensures clear instructions on who will manage distributions should the primary trustee become incapacitated.

How do I know if a loved one needs an SNT?

An SNT stands as a vital method to ensure that your loved one receives the necessary care and support even after your passing. It’s an important consideration for parents, grandparents, siblings, and legal guardians of dependent individuals. The beneficiaries of SNTs encompass a diverse range of impairment levels. While some can maintain independent living but struggle with financial management, others need continuous supervision and care, often residing in group homes, nursing facilities, or receiving long-term care. Regardless of the extent of care your loved one requires, an SNT can offer the peace of mind you seek.

Again, an SNT is created to provide additional support for an individual with disabilities alongside any government assistance they may receive. When properly drafted, this trust permits the beneficiary to maintain eligibility for government benefits while also remaining able to access funds from the trust via the trustee. As you can see, setting up and managing an SNT involves navigating various rules and regulations. At NJ Elder Law Center at Goldberg Law

Group, we are experts in planning for loved ones with disabilities. Proper planning is crucial, and we're here to help. If you have any questions or would like to schedule a free consultation, please call our office at (973)-228-1795.