SPECIAL NEEDS TRUSTS FOR DISABLED AND MEDICAID-QUALIFIED BENEFICIARIES

Disabled children and other Medicaid-qualified family members, such as a spouse or parent suffering from Alzheimer’s disease, present unique estate planning challenges. A primary goal of the family is to make sure that these beneficiaries will have all the resources they may need to enjoy a good quality of life, while still maintaining eligibility for SSI, Medicaid, and other public benefits.

Specialized planning will also be necessary when the disabled family member is entitled to outright ownership of a sum of money, for example a direct inheritance coming from a deceased relative’s estate, or the damages awarded as the result of a lawsuit. (Such lawsuits often arise when the negligence of others was the cause of the disability).

In each of these cases, a unique type of trust, known generally as a Special Needs Trust, has been developed that will allow the funds that are available in both of the situations described above to be maintained for the disabled family member’s benefit while still preserving their eligibility for public benefits.

This Article will discuss the two kinds of Special Needs Trust that are used for such beneficiaries, and the planning opportunities available for their families.

CONTENTS

■ THIRD-PARTY SPECIAL NEEDS TRUSTS

■ Options for Providing for a Disabled Family Member

■ Designing and Administering a Discretionary Supplemental Needs Trust for a Disabled Family Member

■ Steps to Take in Estate Planning

■ SELF-SETTLED TRUSTS USING THE DISABLED PERSON’S OWN ASSETS

■ Payback Trusts

■ Pooled Trusts

■ COMPARING THE SPECIAL NEEDS TRUST AND SUPPLEMENTAL NEEDS TRUST

 


■ THIRD-PARTY SPECIAL NEEDS TRUSTS

Third-Party Special Needs Trusts are used by families who want to provide for a disabled child or other Medicaid-qualified family member, and whose wealth is not likely to be sufficient by itself to pay for all of the person’s lifetime support, and who thus want the disabled family member to receive all public benefits to which he or she may be entitled. (This article will refer to a disabled “child,” but the same discussion would apply to an older family member suffering from Alzheimer’s disease or other cause of disability.)

BASIC QUESTIONS:

Who Will Be Substitute Caregivers? 

If the disabled child’s parents have been providing for his or her daily living needs, the practical questions are: What will happen when the parents can no longer handle these duties?  Who else would be able and willing to provide an appropriate level of care for the disabled child?

Who Will Take Over Their Financial Affairs? 

Who will administer the disabled child’s property and financial affairs, including acting as their advocate with government agencies to make sure that they receive all public benefits, such as SSI and Medicaid, when the parents are no longer able to perform those functions?

What to Avoid

If no planning has been done in one or both of these areas, a court-supervised guardianship will be the only alternative. However, guardianship should be seen as the solution of last resort, to be avoided if at all possible.

Thus, the key planning goals for the parents, grandparents, and other family members will involve maintaining the disabled child’s eligibility for need-based public benefits while protecting the family’s property from a government claim for reimbursement of such benefits.

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Options for Providing for a Disabled Child

Direct Outright Transfer to Child

This option will be the de facto result if the parent dies without a Will, since the parent’s property will then pass outright under state law. The same result will occur if the parent’s Will makes an outright bequest to the disabled child.

This is an inadvisable solution, even if the child may be marginally capable of managing the bequest.

Because the child will be the owner of the bequest, the property will be immediately vulnerable to reimbursement claims by the state, if the child was previously receiving public benefits.  Direct ownership may also render the child prospectively ineligible for future needs-based government assistance programs until the bequest has been totally spent.

An outright transfer thus will likely benefit only the state, not the child.

Indirect Transfer to Child Using a Third Party

The “indirect transfer” technique involves transferring property intended for the disabled child to a third party, such as a sibling or other family member, with the informal understanding that the third party will use the property to provide for the needs of the disabled child.

This in an inherently risky maneuver, because there can be no assurance that the disabled child will ultimately receive any of the property. Since by definition the disabled child can have no legal claim to the assets, the bequest will be treated as the property of the third party.

Even if the third party is totally trustworthy, there is always the unavoidable risk that he or she may die, be divorced, acquire a creditor as the result of a lawsuit, or go into bankruptcy. In any of these events, the property will likely be involuntarily lost.

Transfer to a Trust for the Disabled Child

While a trust in theory may protect the property for the disabled child, not all trusts afford the same degree of protection. In the context of estate planning for a disabled child, these differences can become crucial.  Choices among trust models include:

Mandatory Distribution Trust

This type of trust would require the trustee to pay the trust’s income or principal, or both, to the disabled child, with no discretion to retain the property inside the trust.

A mandatory distribution-type of trust would be inadvisable for a disabled child, since it does not allow the Trustee to withhold making distributions if they are not needed by the child.  The income and/or principal would be treated as an available resource to the child, and would disqualify the child from all needs-based government programs until the trust fund was exhausted.

Support Trust

A trust of this kind directs the trustee to make distributions of income and/or principal as needed to provide for the disabled child’s “support” or “maintenance.” Although almost all trusts for children routinely contain such terms, they are not recommended for a trust intended to benefit a disabled child, since these very words will likely make the trust assets be classified as an “available resource” and thus disqualify the child from needs-based government programs.

Discretionary Supplemental Needs Trust

This kind of trust directs the trustee to make distributions for the child’s benefit, but it allows the trustee complete discretion as to the amount and timing of such distributions. The stated purpose of this trust is that trust property should only supplement — but not supplant — the public benefits for which the child is eligible.

Because the trust does not mandate distributions, or even establish a fixed standard for distributions (e.g., “support” or “maintenance”), it will not be treated as an available resource for government-program eligibility purposes.

Best Choice: Discretionary Supplemental Needs Trust

Comparing the three trust models, the Discretionary Supplemental Needs Trust will best shield family assets intended to benefit the disabled child from state claims for reimbursement, while at the same time allowing the trustee to provide for any needs of the child that are not covered by government programs.

Pennsylvania courts have consistently upheld such Discretionary Supplemental Needs Trust from state attack, finding that a discretionary trust funded with assets contributed by the child’s parent or other third parties, and where the trust property is clearly intended only to supplement and not supplant public benefits, does not count as a resource of the disabled beneficiary, and the trust is not liable to repay public benefits provided to the beneficiary.

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Designing and Administering a Discretionary Supplemental Needs Trust for a Disabled Family Member

A Discretionary Supplemental Needs Trust can be created either in a parent’s Will or by a Lifetime Trust. That choice will depend on the parent’s overall estate planning goals, and whether perhaps grandparents and other family members may also want to make gifts to benefit the disabled child.

Using a lifetime trust has certain advantages. For instance, it can ensure that the disabled child will begin to receive benefits at the time parental support stops, whether that occurs upon the parent’s death or earlier in case of the parent’s lifetime incapacity.

Selection of Trustee is Crucial

Whom should you appoint as the trustee or trustees of a Discretionary Supplemental Needs Trust?  If the Trust will be established in the Will of the second parent to die, by definition neither parent will be available to serve.  One or more other persons or a trust company will have to be named to serve either individually or together as the initial and successor trustees.

Special talents are required of trustees of a Discretionary Supplemental Needs Trust. They must not only be able and willing to serve as trustees in the traditional sense, such as prudently managing and investing the trust property, but they must also be committed to acting proactively as the disabled child’s protectors and advocates.

For example, the trustees should be committed to spending time regularly with the disabled child and his or her caregivers to identify the child’s current needs, to investigate all sources of private funds, such as health insurance, and public benefits that may be available to meet those needs, and to ensure that the child applies for and receives all the public benefits to which he or she is entitled.

Expenditures from Supplemental Needs Trust

Distributions should be limited to providing for any additional needs or extra benefits that other sources do not cover.

An individual trustee thus should have both the time and the talent to carry out these tasks.  A trust company can be appointed to serve as a co-trustee with the individual, or it can be named as an alternate or successor trustee to serve if the individual trustee is or becomes unable or unwilling to serve.

It is important to choose a trust company (not necessarily a bank trust department) that has special expertise in administering Supplemental Needs Trust and acting as a protector and advocate for special needs beneficiaries.

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Steps to Take in Estate Planning

As is evident from the above discussion, estate planning for families with a disabled child involves many considerations. Any plan for such a family should start with an understanding of the specific disabling condition that affects the disabled child.

Capacity is not an all-or-nothing condition. An estate plan intended to benefit a child who, with some supportive services, can live independently in society may differ significantly from a plan for a child who will always need institutional care.

If the child is physically but not mentally impaired, the estate plan should recognize the child’s ability to make decisions and participate in the management of his or her financial resources.

Any estate plan should be flexible.  The plan should address the possibility of a change in the child’s condition. The less certain the long-term prognosis, the more flexibility the plan should contain.

As with any estate plan, be prepared to review and if necessary revise your estate plan every three to five years, or any time there is a significant change in the law.

Don’t Overlook Estate Planning for the Rest of the Family

Planning for the needs of a disabled child should properly be done within the context of the family’s overall estate plan. Such a plan should consider:

✔ Lifetime needs of parents, including both property protection in the event they become incapacitated, and health-care powers of attorney and end-of-life directives.

✔ Death-time planning for the tax-efficient transfer of property to the next generation.

Once the overall estate plan has been designed, then specific planning for the disabled child should be addressed.

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Self-Settled Trusts: Planning With the Disabled Child’s Own Assets

The use of the discretionary supplemental needs trust as recommended above is based on the assumption that the trust will be funded exclusively with assets contributed by a parent, grandparent, or other third party, with none of child’s own assets being placed in the trust.

By contrast, if the assets sought to be protected belong to the disabled child himself or herself, a self-settled type of trust, commonly referred to as a Special Needs Trust, is the vehicle of choice.

Basis in Federal Statutes. Since the Medicaid and SSI eligibility protection offered by a Special Needs Trust is based on federal statutory law, specifically 42 U.S.C. § 1396p(d)(4)(A) and § 1396p(d)(4)(C), it is essential that the Special Needs Trust be designed and administered in conformity with the statute’s requirements.

Pennsylvania has also enacted a statute as part of its Public Welfare Code that spells out the provisions that a Special Needs Trust must contain in order to receive approval from the Pennsylvania Department of Public Welfare (“DPW”).

The Special Needs Trust can allow the disabled child to receive the same kind of discretionary benefits that are available with a Supplemental Needs Trust, yet still allow the child to retain his or her eligibility to receive government benefits.

Under the Special Needs Trust Fairness Act, signed into law on December 13, 2016, a competent disabled person under age 65 can establish his or her own Special Needs Trust, without having to use a proxy or obtain court permission to do so.

A Special Needs Trust can take one of two forms, based on the requirements of § 1396p(d)(4)(A) or § 1396p(d)(4)(C):

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Payback Trust

The “Payback” or “d4A” Special Needs Trust must provide that upon the death of the disabled child (or earlier termination of the Trust), DPW must first be reimbursed up to the total amount of medical assistance that will have been paid out on behalf of the child, before anyone else can receive any part of the remaining Trust property.  (As noted below, a Pooled Trust has a somewhat different rule.)

To make sure that DPW’s right of reimbursement is enforced, the trustee is required to notify DPW upon the death of the beneficiary (or earlier termination of the Trust) and request a statement of its claim.

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Pooled Trust

The “Pooled” or “d4C” Special Needs Trust must provide that at the Trust’s termination the assets not retained to benefit other disabled individuals (generally not more than 50% of the total) must be used to repay DPW. In this case nothing will pass to the disabled child’s family.

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Comparing the Special Needs Trust and Supplemental Needs Trust

The big difference between the self-settled Special Needs Trust and the third-party funded Supplemental Needs Trust is the statutory limitation imposed on Special Needs Trust with regard to who can receive the trust assets that may remain when the trust terminates.

No such limitations are imposed on the Supplemental Needs Trust, so that it can provide that all the remaining assets are to be paid out to surviving family members or revert back to the parent who funded the trust if he or she is then living.

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