Special Needs Trusts
By: Sally Manikian

Sally Manikian   Photo:  Jamie Stephenson

All parents expect their children to outlive them. It's natural for the next generation to carry on family traditions and inherit the family possessions when parents are gone. Plans for the parent's death usually take the form of a last will and testament that passes on the parents' estate and personal possessions to their adult children. Inheritance may consist of the family home or business or just a box of mementos. Whatever the situation, parents plan to pass the reins to their children eventually, hopefully after the children are established in their own adult lives.

Parents of individuals with disabilities, although they wish they could outlive their children, must face the inevitable: the adult child living without the parent's care, oversight and financial support. This concern changes the situation described above. Now the concern is not just the mere dividing of assets but how to ensure that the child's life can continue undisturbed once the parent's guidance and income are gone. The law has responded to meet that need in the form of the 'special needs trust,' a mechanism to allow the adult with a disability to continue his familiar lifestyle without disturbing public benefits he received.

A trust is a legal relationship that anyone, not just the ultra rich, can create. A trust has a different purpose than a will. A simple way to conceptualize the difference is to think of a testamentary transfer (from a will) as a one-time gift, while a trust has the effect of constant financial support. Also, the structure of the two is different. A will involves only two people: the person giving and the person receiving. A trust, on the other hand, is tri-partied: the person giving (the settler), the person receiving (the beneficiary) and the person monitoring and managing the trust (the trustee). A 'special needs trust' is a particular kind of trust.

The technical distinctions described above have a real world effect if the child has a disability and relies on public benefits such as Medicaid. For example, an individual with a disability may receive Medicaid and Social Security benefits as well as small financial contributions from her parents. Upon their deaths her parents want to leave funds so that their child can continue to live comfortably and enjoy the extra little things she is accustomed to, such as a trip to spend Christmas with a beloved sibling. To remain eligible for Medicaid, the beneficiary cannot have more than $2,500 in resources and must meet the current income test for eligibility. For Social Security the resource limit is $2,000.

A will will not benefit the adult with a disability in the long term in the way that the parents intended. If the parents give their child with a disability $50,000 (e.g. her share of the sale price of the parent’s home) in one transaction in their will, their child with disabilities will receive that amount all at once and immediately lose Medicaid and Social Security benefits. To regain public benefits, she would have to spend down the $50,000 to $2,500 for Medicaid and $2000 for Social Security. This could happen quickly if the individual with disabilities requires home nursing care, for example. When the inheritance is spent down, she will have less than $2,500 from her parents to live off of for the rest of her life while her siblings without disabilities who have the ability to achieve high-income levels during their lifetime can bank their share for a “rainy day”.

However, if the parents create a trust with the child with a disability as beneficiary, the $50,000 will not count as her assets and she can continue to receive public benefits. The parents must name a trustee to oversee the trust and be accountable for the use of the funds and assets in the trust. A sibling or other close family member or trusted friend are natural choices for trustee. It is very important that the parents convey their wishes and dreams for their child with a disability to the trustee in a very clear, detailed way.

The trustee will manage the trust principal (the $50,000) and continue to provide for the adult with disabilities in the same way that his parents did while they were alive. The amount that the trustee manages for the individual with a disability will not disturb the public benefits because his available resources will not be above $2,500. This way, the $50,000 that the parents leave for him will last longer since he will be receiving a combination of public benefits and the benefit from the trust.

What really distinguishes a special needs trust is the language and structure of the trust. Remember that the purpose of a special needs trust is to not disturb public benefits. Public benefits provide coverage for basic food and shelter needs as well as basic medical care. A special needs trust is a way to enable the individual with a disability access to items and services that public benefits don't cover, such as dental care, transportation, and recreational and social activities that are central to the her quality of life. Many people would agree that food and shelter are important to quality of life, but often a individual with a disability requires more for basic quality of life. For each person, it's a little different: some might enjoy videos, while others might like books about bats. As parents of individuals with disabilities will attest, the quality of life for their children is not just food, shelter, and basic medical care. To provide those kinds of items is the purpose of the special needs trust!

To fulfill this purpose, the document itself must be carefully structured so it can be classified as a special needs trust in the eyes of the law. The key aspects of this are that the trust assets are not 'available' to the individual (beneficiary) and that money spent from the trust may only be used to supplement and NOT provide basic needs. A special needs trust would therefore include sections that allow money to be spent on recreational activities, further educational opportunities, or travel costs to visit family, but NOT include sections that would allow money to be spent on food or rent. Once classified as a special needs trust, the funds in it will not count as resources for the purposes of establishing Medicaid and Social Security eligibility.

But what sources can provide for a special needs trust? In the eyes of the law, the assets in the trust must belong to the trust and be used to benefit the individual with a disability; however, the assets can come from multiple sources. For instance, referring to the example above, in addition to the $50,000 from her parents, the individual’s aunt also contributed $5,000 to the special needs trust. This is fine but it gets tricky when the source of the assets might be a judgment or settlement. When the individual with a disability receives a settlement of a damage suit, the State can reclaim part of that amount before it is deposited into the trust if the individual has been receiving Medicaid. The state has a right to claim the amount that the individual has already received from the State after the injury; any amount left over can go to the trust.

As mentioned already, a trust is a special arrangement that involves three parties: the settler, the beneficiary, and the trustee. In the example above, the parents created a trust for the individual with a disability with another person as trustee. The settler (parents) often name a sibling or other close relative/friend as trustee. However, the third party that manages the trust can really be anyone except the beneficiary. According to laws passed by Congress, individuals with a disability can use the money they receive to create a trust with themselves as the beneficiary. This particular kind of trust is a 'self-settled' trust. It is also important to note that in this arrangement, any amount in the trust remaining on the death of the individual with a disability must go to the State.

Another alternative third party trustee could be a non-profit organization. In this kind of trust, called a 'self-settled pooled special needs trust', the trust is managed by a non-profit organization rather than a single person. For some people, this might be the more desirable option. Like the ‘self-settled’ trust above, the State has the opportunity to make a claim after the beneficiary’s death but if it does, the non-profit organization can receive the State’s portion and the remainder can go to the beneficiary’s heirs.

Creating a special needs trust is a delicate task. It requires specific provisions, descriptions, and language. It requires expertise that only a lawyer who specializes in estate planning can provide. As repeated often throughout this article, the purpose of a special needs trust is to SUPPLEMENT public benefits. A simple grammatical misplacement in a sentence could result in a trust not being classified as a special needs trust and problems could arise.

To ensure that your child's needs are met and that she continues to live comfortably, a special needs trust must be constructed carefully and exactly. The document may seem overly wordy at first glance but drafting a finely detailed trust is necessary to ensure not just that the needs of the beneficiary will be met, but also that legal tangles won't arise from a poorly worded trust. According to Professor Ed Imwinkelried, professor University of California Davis School of Law:  “Many a dispute could have been avoided by insultingly explicit language and good drafting.”

The life of a parent of a child with disabilities can be extraordinary in the true sense of the word-that every effort involves something a little extra above the ordinary. Estate planning for most parents would involve concerns for what happens to their possessions, assets, and most importantly their children when they pass on. The special needs trust is that little extra that the parent of a child with disabilities must think about.

For more information on special needs trusts:

Enhanced Life Options Group
15 Constitution Drive Suite #169
Bedford, NH 03110
Phone: (603) 524-4189 or (603) 472-2543
TDD Access N.H. Relay 1-800-735-2964
E-mail: contact@elonh.org

NH Bar Association    
112 Pleasant St.
Concord, NH 03301

Telephone: 603 /224-6942
Fax : 603 /224-2910

Business Hours: 8:30 am - 5 pm, Mon- Fri