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John Bair
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Which Type of Special Needs Trust is Right for Your Disabled Loved One?

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We work with a lot of attorneys who represent clients with disabilities.  One of the questions we receive most often concerns Special Needs Trusts (SNTs)—which type is right for the plaintiff?

For those who may not be very familiar with SNTs, they allow individuals with disabilities to access the proceeds of their settlements while maintaining important needs-based government benefits like Medicaid and Supplemental Security Income (SSI).  Federal law permits the creation of SNTs as an exception to the normal “spend down rule” to provide for the needs of the disabled individual.

There are two main types—both can be funded with the disabled individual’s assets, but each comes with its own set of guidelines:

 (d)(4)(a)/Self-Settled Trust

WHO is eligible?  This type of trust can be established for disabled* individuals under the age of 65.  If assets are added after age 65, those assets may be subject to transfer penalty rules.  There are some exceptions to the transfer penalty, depending on the source of funds.

WHO needs to establish it?  A parent, grandparent, legal guardian, or court must establish the trust.  In some circumstances, a mentally capable disabled individual can petition the court to establish their own SNT (proposed legislation may eliminate the need to petition the court in these instances).

WHAT are the conditions?  The trust must contain a payback clause to reimburse the state for Medicaid benefits paid during the beneficiary’s lifetime.  Upon the death of the beneficiary or upon termination of the trust, reimbursement must be made to Medicaid. The trustee is responsible for paying the last expenses of the beneficiary, then distributing the remaining trust assets in accordance with the trust agreement.

HOW are the assets used? Assets can only be used for goods and services provided for the benefit of the disabled individual.

 

As an alternative to the self-settled trust, a pooled trust can provide a cost-effective and flexible solution for managing the funds of a disabled individual.

 (d)(4)(C)/Pooled Trust

WHO is eligible? Disabled* individuals are eligible, but with no age restrictions.  However, if assets are transferred after age 65, those assets may be subject to transfer penalty rules.

WHO needs to establish it?  A Pooled Trust must be established and managed by a non-profit entity (as defined in § 501(c) of the Internal Revenue Code) that has tax-exempt status under IRC § 501(a). The grantor (individual entering into the trust agreement) must sign a joinder agreement to “join” the pooled trust. The terms of the trust are set forth in a master trust agreement.

WHAT are the conditions?     The trust must maintain separate accounts for each trust beneficiary, but the funds are pooled for purposes of investment management, an approach that minimizes administrative costs. Each separate trust account must be established solely for the disabled individual and only that individual, the individual’s parent, grandparent, legal guardian or the court may place funds in the trust.  Any funds that remain in the individual’s account upon their death may be retained by the trust; those funds not retained typically must be used to reimburse the state for Medicaid assistance.  After Medicaid is paid back, any remaining amount will either be absorbed by the trust, or provided to the death beneficiary, as designated in the joinder agreement.

HOW are the assets used? Distributions from the trust are solely for goods and services provided for the benefit of the disabled individual.  Distributions are paid by the trustee directly to the provider of the goods and services to ensure they are not counted as an asset or resource for Medicaid and SSI eligibility purposes.

A Special Needs Trust can serve as an effective tool for managing the funds of a disabled loved one.  Before you decide to establish one, make sure you research the rules governing Medicaid in your state, as that may affect how efficiently the trust will work in your individual situation.

*Individuals must be classified as disabled by Social Security Administration and/or State Medicaid Agency standards.

 

DISCLAIMER: Milestone Consulting, LLC does not provide legal or tax advice.  Please consult an attorney and/or estate planning expert if you have questions regarding the legal or tax implications of your settlement.

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