Understanding Special Needs Trusts and Pending Legislation

In the March edition of Elder Counselor we offered several tips for special needs planning. Establishing a Special Needs Trust (SNT) is among the many planning strategies that can help to improve an individual’s quality of life. Because individuals with special needs face many quality-of-life and care challenges, and addressing those issues can be expensive, many individuals with special needs depend on public benefits, such as Medicaid or VA. Unfortunately, public benefits often fail to meet all of their needs. However, the supplemental needs of those individuals (meaning needs not covered by public benefits) can be met by using funds held in a special needs trust (SNT).

Understanding Special Needs Trusts

A special needs trust (SNT) is a trust that is established for an individual with special needs who is or may become dependent on public benefits. The trust is specifically designed to meet certain supplemental needs and to enhance the quality of life for the special needs person, who is the beneficiary of the trust. Most importantly, the SNT is created so as to not disqualify the beneficiary for the public benefits being received. The trust, then, is a pool of money available for the benefit of the special needs individual in order to provide him or her with goods or services that public benefits do not provide. For example, SNT funds may be used for in-home care services that would otherwise not be affordable to the beneficiary. Should a person with special needs receive these funds outright and outside a properly created SNT, the individual may become ineligible for the public benefits, and reinstatement of the benefits can be a difficult process.

There are two types of SNTs: A third-party SNT and a first-party (or self-settled) SNT. A third-party SNT is one in which a loved one has assets that he or she would like to use to benefit the individual with special needs. A self-settled SNT is one in which the assets belong to the individual with special needs.

A self-settled SNT is often used in the case of a litigation settlement. One example involves an individual who was in a car accident and sued the “at fault” driver successfully. By the time the lawsuit settlement was reached, the individual had been declared disabled. Instead of the settlement funds being given outright to the person who is now disabled, the funds could be placed into a self-settled SNT for the benefit of that individual. This allows the person with the disability to continue to receive disability benefits and have the settlement money available to him or her for supplemental purposes, increasing his or her quality of life.

Self-settled SNTs have been recognized by federal law since 1993 under 42 USC §1396p (d)(4)(A). A self-settled SNT contains a mandatory payback provision, meaning that upon the death of the beneficiary, the State will be paid back from the remaining trust assets up to the amount of public benefits expended on behalf of the beneficiary during his or her lifetime.

Within a self-settled trust an individual trustee or corporate trustee is appointed to manage the funds in the trust. Choosing the correct trustee is an important decision as the trustee will be responsible for managing and investing trust assets and is responsible for following the guidelines regarding proper distributions from the trust. Failing to do so could result in a loss of benefits for the trust beneficiary.

A Special Needs Planning attorney is an essential advocate when preparing an SNT for an individual with special needs. The attorney will be able to identify the type of SNT that would be helpful in the particular situation and will know how to properly construct it so as to prevent the person with special needs from being kicked off his or her benefits. There are many roadblocks that can arise in the planning process, and it is imperative that you have an attorney familiar with the many federal and state laws and regulations concerning public benefits and SNTs.

Problem with the Current Law & Pending Legislation

The law, as currently written, states that a first-party trust may only be established by the individual’s parent, grandparent, or a court of competent jurisdiction. It appears that the absence of an option for a competent individual to establish his or her own trust under 42 USC § 1396p (d)(4)(A) was a simple mistake by the writers of the law. However, this minor mistake causes major financial losses to disabled individuals. Disabled individuals who have no parent or grandparent to establish the SNT for them must spend money on an attorney and court costs in order to obtain a court order to establish the trust. The money to accomplish this is often such an impediment for these individuals that they do not pursue it and end up either kicked off the public benefits or forgoing the supplemental monies they would otherwise have access to.

Currently there are two identical bills sitting in the House of Representatives and in the Senate which would create the option for a competent individual who is disabled to establish his or her own trust under 42 USC § 1396p(d)(4)(A). In May 2013, H.R. 2123 was introduced in the House, and the next day it was referred to the House subcommittee on Health, where it currently sits. A few months later, in November 2013, S. 1672 was introduced in the Senate, was read twice, and was then referred to the Committee on Finance. The title of the identical bills is “The Special Needs Trust Fairness Act of 2013,” and each is described as “a bill to amend title XIX of the Social Security Act to empower individuals with disabilities to establish their own supplemental needs trusts.”

Conclusion

As advocates for individuals with special needs, it is important that we support legislation which will expand our clients’ options with regards to establishing special needs trusts. Please contact your Congressional representative and ask for the passage of these bills. Encouragement from us informing legislators of the importance of these bills to our clients is imperative to get the bills recognized and enacted. Otherwise, they may get lost in the shuffle, and our clients’ needs may not be adequately addressed.

Setting up a Special Needs Trust can help many people with disabilities to finance the care they need using both public benefits and private funds, but setting up an SNT is no small matter and requires a thorough understanding of trust laws. If you have a client with special needs who would benefit from the establishment of an SNT, please contact Elder Law of East Tennessee. We are committed to and passionate about assisting those with special needs and look forward to helping in any way we can.