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Estate Planning for the Disabled

Special Needs Trusts

A special needs trust (SNT) (or special needs trust provisions in a Will or in another trust) should be considered to protect the financial interests of a person who is disabled or incapacitated. The term “disability” or “incapacitated” has a wide range of meanings. Generally speaking, an individual who would be unable to manage financial matters without guidance or who would be better served by someone else retaining control of the assets, would fit within the terms of “disabled” or “incapacitated“.

In some cases, certain types of trusts are essential in order to preserve the benefits the disabled person is currently receiving. When a person is otherwise eligible for Supplemental Security Income (SSI) and/or Medicaid benefits, and then directly receives an inheritance or personal injury award, this would immediately disqualify him or her from public “needs tested” benefits. If the funds are instead placed in an approved, qualified special trust (“first-party trust“), (s)he would not be rendered ineligible for government assistance. There is a requirement that any Medicaid lien be repaid (to the state providing benefits) from the Trust remainder.

Even if a person is not currently receiving government benefits, but is under a guardianship because of disability, the outright receipt of an inheritance or gift would cause unnecessary complications and fees. Again, additional expenses, publicity, and often the need for court supervision can be avoided by placing the person’s inheritance or other funds in an appropriate trust.

To determine the type of “special needs trust” required in a specific case, the question is: Who “owns” the property to be contributed to the Trust? A “third-party type” trust is very different (more flexible) from “first-party type” Trust. If the special needs person never “owns” the property, then the” third-party type” trust can be used effectively.

While it is difficult to generally suggest specific provisions that should be placed in a trust for an individual, there are certain guidelines that, if followed, will help protect the funds and the beneficiary.

In the typical case of a family with a disabled child, a parent (or other relative) may want to provide for the disabled child upon the parent’s death. If the child is receiving (or may in the future receive) needs tested government benefits, an outright bequest to the child will disqualify the child from receiving government benefits. This could be very expensive and reduce the disabled child’s standard of living substantially. Instead, the parent can consider placing the child’s share in a “supplemental needs trust” or a “fully discretionary trust” (third-party type trust).

A supplemental (or “special”) needs trust (SNT) is a trust (revocable or irrevocable, depending on circumstances) for the benefit of the disabled person. The operative provisions require the trustee to make distributions only to or for the disabled person to provide for the needs of that person over and above the person’s basic needs for food, clothing, and shelter. Government regulations provide that if a person receiving certain disability benefits (SSI) has unrestricted access to (trust) assets that may be used for the person’s basic needs and support, those assets will be considered as an ‘available resource’ to that person. The SSI program is a welfare program and eligibility is based on financial need. If the trust assets are considered available, then the individual could lose his or her eligibility.

Some SNTs are designed with “self-destruct” provisions if the continued existence of the trust would cause the beneficiary to lose his or her government benefits. While the self-destruct provision may be useful, it should provide that upon termination of the Trust, the assets will not be distributed directly to the disabled beneficiary.