A Third-Party Funded Special Needs Trust is a form of trust created as part of an estate plan when a “third-party,” such as a parent, intends to leave money to her child or loved one with special needs. There will be no payment to the State for Medical Assistance as long as this trust is fully supported by third-party funds and not by the person with disabilities. As a result, after the trust expires, the residual funds can be distributed to other family members, loved ones, or charitable organizations.
A parent of a special needs child will almost always wish to employ a third-party special needs trust since it will not only safeguard that person’s eligibility for public benefits if they are needed, but it will also serve as a valuable money management tool.
A trustee will be in charge of administering and distributing the funds, ensuring that they are neither misappropriated or wasted.
The Trust will also shield the special needs youngster from any unscrupulous individuals who could try to take advantage of the child’s funds.
The funds in the Trust can only be used for the child and cannot be distributed to anyone else.
As a result, a special needs trust sponsored by a third party can protect the kid in a variety of ways.
As previously stated, if necessary, the third-party funded special needs trust could pay for private health insurance. Furthermore, depending on how the trust is written, it may include a clause allowing the trustee to terminate the trust if the trustee deems it is no longer necessary. If the crippled beneficiary has private insurance and is capable of handling the assets, the trustee may choose to end the trust and release the cash to the disabled beneficiary. The trustee has the authority to terminate the trust if he does not believe it is in the best interests of the kid.
Overall, we do not expect the ACA will dramatically alter the necessity for a third-party financed special needs trust in most estate plans because it 1) has no state repayment obligation, 2) safeguards the person’s eligibility for public benefits, and 3) provides an important money management tool.
The decision to use a special needs trust is a difficult one that must be carefully considered in light of all of the specific circumstances that each case presents.
What can special needs trust not pay for?
Special needs trusts are meant to enhance, not replace, the kind of basic assistance offered by government programs like Medicaid and SSI (SSI). Comforts and pleasures “special needs” are paid for through special needs trusts, which are not covered by public assistance monies.
This means that payments made from the trust for food or shelter on a regular basis or paid directly to the beneficiary will be counted as income to the beneficiary. This may affect your eligibility for government assistance programs such as Medicaid and SSI. One of the trustee’s most essential responsibilities is to use judgment when issuing trust distributions so that the beneficiary’s eligibility for government benefits is not jeopardized.
What can a special needs trust pay for?
Many individuals mistakenly believe that Special Needs Trusts are just for medical expenses or products directly tied to a disability. This image is incorrect, however, because “special needs” is a fairly broad term. Almost all Special Needs Trusts define special needs as anything that the Trust beneficiary’s public benefit programs do not cover.
Because public assistance programs are only designed to cover basic necessities and essentials, they never cover extra products that improve a person’s quality of life.
This is why a Special Needs Trust is so essential since it can pay for supplemental items like a home and a vehicle that will improve the Trust beneficiary’s quality of life.
Home and vehicle upkeep, as well as a vacation, a computer, electronic equipment, educational fees, and continuous monthly obligations such as phone, cable, and internet services, can all be covered by Special Needs Trusts.
They can also pay for supplemental treatment that Medicaid does not cover, such as additional medical care, therapy, and the difference between shared and private rooms.
Of course, the Trust must be adequately capitalized to make these purchases.
While Special Needs Trusts can be beneficial tools, you may be curious about the technical standards that must be met.
First and foremost, they must always adhere to the Trust beneficiary’s public benefit program’s unique rules.
In most circumstances, this means that cash cannot be given to the Trust beneficiary because cash is considered income under most public benefit programs’ eligibility standards.
Even if the same amount does not qualify as income for tax purposes, this is true.
This problem, however, can be easily solved by paying suppliers and service providers directly.
To put it another way, sending money to a Trust beneficiary for the payment of a bill is countable income for the purposes of public benefit eligibility, while paying the same charge straight from the Trust is not.
This means that a Special Needs Trust can meet this technical criterion by merely providing the convenience of a bill-paying service to the Trust beneficiary.
The sole benefit rule is another condition that Special Needs Trusts must follow.
This is a simple concept to grasp, but it is necessary to first grasp a more basic rule that applies to Medicaid and SSI.
This more general regulation states that those who desire to be eligible for SSI or most Medicaid programs cannot give away their assets.
Uncompensated transfers occur when people give away their assets without receiving fair market value.
A penalty time will be imposed on anyone who makes an uncompensated transfer.
There are no criminal or civil punishments associated with penalty periods, however the person will be denied Medicaid and SSI for a period of time.
The length of the punishment will be determined by the amount of money transferred without recompense.
Returning to Special Needs Trusts, the sole benefit rule expresses the more general rule regarding uncompensated transfers when applied to Trusts.
In other words, you cannot make an uncompensated transfer before establishing your Special Needs Trust, and the sole benefit rule ensures that your Trust does not make an uncompensated transfer after it is founded.
Two things must always happen under the sole benefit rule.
First, Trust disbursements must result in the purchase of an item or service, and second, the direct benefit of the purchase must be received by the Trust beneficiary.
While the sole benefit rule is a technical necessity, it actually benefits the Trust beneficiary by ensuring that the Trust beneficiary receives the whole benefit of his or her Special Needs Trust.
The Center for Special Needs Trust Administration, Inc. has significant experience managing Special Needs Trusts to ensure that they meet all technical standards while providing the most convenient experience for Trust beneficiaries.
In addition, the Center has substantial disbursement expertise with a wide range of purchases.
The Center, for example, has a separate team for home purchases and a special team for vehicle purchases, in addition to properly managing recurring payments.
The Center not only ensures that a Trust beneficiary’s public benefits are maintained, but its specialized teams can also oversee and assist with big purchases at the request of a Trust beneficiary.
What expenses can a supplemental needs trust pay for?
A Special Needs Trust (SNT), also known as a Supplemental Needs Trust, is a trust that provides supplemental benefits to people with disabilities while keeping them eligible for government benefits like Medicaid and SSI. An SNT pays for products and services that are not covered by government benefits.
The things on this list are not exhaustive, but rather serve as examples of how an SNT might help a person improve their quality of life by paying for a variety of items on their behalf.
Basic requirements such as food and shelter can be met with SNT funds, but this may reduce the amount of SSI benefits received by the beneficiary, necessitating careful examination.
To ensure that the trust is correctly administered, the beneficiary’s needs are addressed, and government benefits are preserved, a trustee should use judgment when making distributions and confer with an attorney versed in special needs planning on a frequent basis. Click here to watch Amy’s most recent video on special needs planning.
What can my special needs trust pay for without affecting my disability benefits?
A Special Needs Trust (SNT), sometimes known as a Supplemental Needs Trust (SNT), is a legal arrangement in which a person or institution (such as a bank) controls assets for a disabled person. The “beneficiary” is the individual with the disability, and the “trustee” is the person who manages the assets. A trust can hold a variety of assets, including cash, equities, bonds, and real estate.
SNTs allow a person with a disability to meet their requirements without losing or diminishing their benefits, such as SSI, Medi-Cal, In-Home Support Services (IHSS), and HUD housing support. The asset limit for SSI, Medi-Cal, and IHSS is not affected by assets in an SNT.
Can a special needs trust pay for clothing?
Unearned income is cash or gift cards given straight to the beneficiary from the special needs trust (SNT) for whatever reason. According to SSI guidelines, for every dollar of unearned income obtained, the same amount is deducted from SSI benefits for the same month (Medicaid beneficiaries must have at least $1.00 in SSI to qualify). The maximum SSI compensation was increased to $771 per month in January 2019.
In-Kind Support and Maintenance (ISM) | Food and Shelter Expenses
Food and shelter expenses paid by the special needs trust (or any other source) are considered revenue in the form of in-kind support and maintenance (ISM) to a third-party provider of goods or services.
ISM â Maximum 1/3rd Reduction in SSI Rule
Direct cash contributions to the beneficiary will lower the SSI benefit dollar for dollar and, if given in excess, may result in the loss of SSI / Medicaid eligibility. Receiving non-cash benefits from the trust (or another source) that are designated “In-kind support and maintenance” (ISM) benefits reduces the SSI benefit dollar for dollar up to a maximum of 1/3rd of the maximum SSI benefit + $20.00.
This is relevant because if an SSI user receives less than 1/3 of the maximum SSI benefit, ISM distributions can lead them to lose Medicaid eligibility (most Medicaid programs require that the individual receive at least $1.00 from SSI).
The SNT Trustee has the authority to compensate third parties for products acquired for the benefit of the trust beneficiary. Personal purchases, such as clothing, a computer, paying a phone bill, or filing taxes, have no bearing on SSI. However, if food or shelter are purchased, it is classified as ISM.
Use of Credit Cards
When a special needs trust pays a credit card bill, for example, this can be perplexing. SI 01120.201I.1.d. defines the following:
If a special needs trust pays a credit card payment for a trust beneficiary, the amount of income the individual receives is determined by the bill’s itemized charges. If the special needs trust pays for food or shelter on the bill, SSA will usually charge the individual with ISM up to the PMV for those things. The individual does not earn income as a result of the payment if the bill includes non-food, non-shelter products, unless the items received would not be completely or partially excluded non-liquid resources the following month.
EXAMPLE: If restaurant charges are included on a credit card bill, payment of the expenses results in ISM. Payment for clothing is not income if the bill also includes the purchase of clothing.
SNT trust disbursements that are not for ISM expenses, including payments directly to third-party vendors (as long as they are not cash to the individual), are not considered income. Educational costs, psychiatric counseling, any medical services not covered by Medicaid, phone bills, and leisure and entertainment costs are just a few examples.
Other expenses that would not have any negative repercussions for SSI eligibility determination purposes include:
- groceries that aren’t food (e.g. laundry detergent, fabric softener, deodorant, soap, personal hygiene products, paper towels, toilet paper, etc…)
- concert or sporting event tickets (for beneficiary and accompanying companion)
- Utility costs that aren’t included in the ISM list (e.g. cable TV, direct TV, internet)
It is best practice to pay for products and services directly to the provider of those goods and services wherever possible.
Prohibited Special Needs Trust Disbursements
– A trustee of a special needs trust should almost never give cash to the beneficiary.
– Providing debit cards or gift cards is generally considered to be monetary equivalents and should be avoided.
– SNT trustees should not make gifts on behalf of the recipient to anybody else (e.g. no wedding, quinceanera or bar mitzvah presents). Gifts will result in a period of disqualification or punishment.
– Do not pay for anything that has previously been paid for by another source, and do not pay for anything that is not in the disabled beneficiary’s best interest.
The beneficiary or trust must be the owner of durable items purchased by the SNT (for example, a car) (car title may show trust as a lien holder). It could be considered as a gift if the title does not specify the recipient or trust as the owner, resulting in a Medicaid penalty.
POMS are used to evaluate Special Needs Trusts: SI 01120.199, SI 01120.200, SI 01120.202, SO 01120.203, SI 01120.225, and SI 01120.227.
How do I terminate a special needs trust?
When a beneficiary dies, the trustee must pay the individual’s final costs and taxes, as well as any liens against the SNT, before making distributions to the remaining beneficiaries. The trustee must compensate state Medicaid for services delivered during the individual’s life in the case of first party SNTs and first party pooled SNTs. In contrast, a third-party SNT is not susceptible to a Medicaid lien upon termination under the legislation. The order in which the trustee fulfills the different tasks is determined by state Medicaid law. In circumstances where a Medicaid lien must be satisfied, the trustee should acquire a record of expenditures from each state’s Medicaid agency that provided services to the beneficiary and follow the proper method for managing reimbursement to the state’s Medicaid programs.
Will I lose my disability if I inherit money?
The Social Security Administration (SSA) offers two different forms of disability benefits: one for disabled workers (SSDI) and another for impaired adults and children with limited income and resources. Inheritances are money that you don’t have to work for. As a result, any inheritance you receive will have no bearing on your SSDI benefits.
Does a special needs trust need to be irrevocable?
Special needs trusts are trusts created to improve the quality of life of people with disabilities while preserving their eligibility for government subsidies. A special needs trust must be irrevocable in order to be effective. This means you can’t revoke it once you’ve signed it and had it notarized, and you can only change or cancel it under particular circumstances specified in the trust itself. If you want to entirely change a special needs trust, simply create a new one and change your estate planning documents to give assets to the new special needs trust instead of the original one.
What happens to special needs trust at death?
The trustee is in charge of dissolving the trust and carrying out the instructions set forth in the trust document. These responsibilities include completing the trust’s last tax return and paying any outstanding income taxes. (For additional information on paying taxes once a special needs trust has been terminated**.) Other fees, such as funeral and burial expenses, may be incurred.
If the trust is a first-party trust, which means it was funded with the person’s personal assets, it will owe money to the state if the person received Medicaid benefits during his or her lifetime. The first-party trust must return the state, dollar-for-dollar, for any Medicaid expenses paid during the beneficiary’s lifetime upon the beneficiary’s death, under a pay-back provision.
First-party Special Needs Trust assets may be subject to federal or state estate tax. In 2020, each individual has a federal exemption level of $11.58 million, which means that no federal estate tax is due if the amount remaining in the beneficiary’s estate is less than this amount. This estate tax exemption will increase each year owing to inflation, but unless Congress acts before then, it will expire in 2025, and the federal exemption threshold will be reduced to $5 million. The tax rate varies from 18 percent to 40%, depending on the amount that is taxed over the exemption threshold.
If the trust has secondary, or remaining, beneficiaries, the assets will pass to them after all taxes and expenses have been paid, according to the trust’s language. Although many trusts mention the residual beneficiaries precisely (e.g., “25% of the trust shall go to Jane, 75% to Mary”), in certain circumstances the trust just names a class of beneficiaries (“the donor’s grandchildren will split the remainder of the trust assets equally”). The trustee is responsible for determining the identity of any unnamed residual beneficiaries, contacting all beneficiaries, and arranging for the trust money to be distributed to them. If any of the remaining beneficiaries are minors or have special needs, the trust may authorize the trustee to keep the trust funds for the benefit of those beneficiaries under conditions that are comparable to those in the original trust.
This is dependent on the trust’s wording and terms. There may be a “amendment provision” in the trust that allows the trustee to make changes to the trust. This could include using a clause known as “power of appointment” to change the beneficiaries of the remaining assets. If the trustee (or, depending on the trust language, the beneficiary himself) has power of appointment, he can write a document to change who would get the assets in the special needs trust after the primary beneficiary passes away. The limited power of appointment is a version that, while limited, nonetheless allows the trustee or beneficiary to make modifications.
A secondary beneficiary could be a youngster, a person with a disability, or someone who is addicted to gambling, drugs, or alcohol. The trustee may have some authority to adjust the distribution of funds to such remaining beneficiaries, depending on the trust’s provisions. Under a law called as a “flexible distribution provision,” the trustee could, for example, keep the funds in a special account. As a result, the trustee has the authority to act in the secondary beneficiary’s best interests while still protecting the trust’s assets.
Special needs trusts are intended to provide cash over a lengthy period of time in order to provide care for the principal beneficiary throughout his or her life. Many things can change throughout this time, so it’s critical that the trust is carefully formed to account for all of them. Similarly, both during the beneficiary’s lifetime and later, the trustee must have a complete understanding of the trust’s terms and conditions.
**What Taxes Are Due When the Beneficiary of a Special Needs Trust Dies?
In special needs planning, trusts are significant vehicles. They not only set aside funds to pay for the person’s special needs care while retaining Medicaid eligibility, but they also give strategies to keep these monies safe throughout the person’s lifetime. But what happens if the Special Needs Trust’s principal beneficiary dies and there are assets left in the trust? What are the methods for calculating and paying taxes?
In most circumstances, the Special Needs Trust will be terminated upon the beneficiary’s death. The trustee is in charge of dissolving the trust and carrying out the instructions set forth in the trust document. These responsibilities include completing the trust’s last tax return and paying any outstanding income taxes. Other fees, such as funeral and burial expenses, may be incurred.
The pay-back provision to the State does not apply if the Special Needs Trust is a third-party trust, which is funded by a relative or parent. The state cannot seek compensation if a third-party trust is terminated, even if the special needs beneficiary accessed Medicaid services. Any remaining money will be allocated to the Special Needs Trust’s remainder beneficiaries or transferred to the estate of the dead person, as stipulated in the trust agreement. The transfer of assets is frequently accompanied by an income tax. The residual beneficiaries’ distributions are reported on their income tax returns, and taxes may be due. The assets in the third-party Special Needs Trust, on the other hand, are not treated as part of the beneficiary’s estate for estate tax purposes, so no estate tax is due.
Furthermore, several states have a separate estate tax that the trust may be responsible for. Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington are among these states. The amounts of the exemptions range from $1 million to $5.682 million. In addition, some states levy an inheritance tax, which is paid by the beneficiaries. Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania are among these states.
Making plans for the death of a disabled loved one is one of the emotional problems of special needs planning. However, as you go through the process, it’s critical to comprehend all aspects of government assistance, taxation, and inheritance. Consult a special needs planner to come up with the best strategy for your family and budget.
What is the difference between a supplemental needs trust and a special needs trust?
With the passage of legislation in 1993 (“OBRA”) authorizing the creation of self-settled trusts (first-party) under 42 USC 1396p(d)(4)(A), some practitioners advocated for a distinction between these new trusts and third-party trusts, which are frequently created by a parent, by referring to the former as special needs trusts and the latter as supplemental needs trusts. However, this strategy was never widely adopted.
Instead, both sorts of trusts have been lumped together under the heading of special needs trusts, and the term “supplemental needs trust” has become obsolete. The name “special needs trust” relates to the trust’s purpose: to pay for the beneficiary’s one-of-a-kind or special needs. In short, the beneficiary is the center of the name, but the name “supplemental needs trust” underlines the shortcomings of current public benefits schemes.
Traditional third-party trusts and first-party trusts created under OBRA are now referred to as (d)(4)(A) trusts (referring to the statute), pay-back trusts (referring to the feature that any funds remaining in the trust at the beneficiary’s death must be used to reimburse the state Medicaid agency), and self-settled trusts (referring to the fact that these trusts are created with the Medicaid beneficiary’s own funds).
Third-party special needs trusts are special needs trusts established with funds provided by someone else, such as a parent, grandparent, or other relative.
In short, the fact that the trusts are referred designated as supplemental needs trusts rather than special needs trusts is a survival tactic. But what exactly does a name mean? Whether supplemental or special, the trusts have the same goal: to help meet the needs of people with disabilities while still allowing them to participate in important government programs.