The Connecticut Elder Law Blog

Special Needs Trusts and the "Sole Benefit" Rule

As wonderful as special needs trusts are for their disabled beneficiaries, there are a lot of "pitfalls" when it comes to trust management/administration; one wrong step can eliminate the beneficiary's eligibility for government benefits.

One of the biggest pitfalls is a trustee running afoul of the "sole benefit" rule.  The rule simply states that the trust must be for the sole benefit of the disabled person.  Put another way, any and all distributions from the trust must be limited to those that benefit the disabled person. 

If the trustee starts making distributions that benefit other people then the risk is that the government could decide that the trust is no longer a special needs trust, which means that all of the trust assets would be considered "available" to the disabled person and government benefits disappear.

Along these lines, be careful if the disabled person is a minor child with financially viable parents.  If a trustee uses trust funds to cover expenses that the child's parents are legally obligated to cover (i.e. basic living expenses), then the government could consider those distributions as benefiting the parents and not the child!  The argument in that scenario is that the trust is relieving the parents of a financial burden.

Again, special needs trust rules are confusing and missteps can trigger severe problems for the disabled beneficiary.  So, if you're a trustee and you're not 100% sure about the propriety of a proposed distribution, then play it safe (in fact, "play it safe" is a decent mantra for all trustees of a special needs trust!) and consult a professional adviser.

 

Beware Trustees of Special Needs Trusts...

If someone with special needs is a beneficiary of a special needs trust and is also receiving SSI (Supplemental Security Income) benefits then the Trustee of the trust must be very careful to not make any distributions that would jeopardize SSI eligibility.

One of the no-no's for the trustee is paying for "food" or "shelter".  If a special needs trust picks up the tab at the restaurant or covers the grocery bill then it may reduce or eliminate the SSI benefits.  Although food is allowed under certain circumstances, such as food provided during a "medical confinement".

There could also be SSI eligibility problems if the trustee uses trust funds to pay for shelter costs such as rent, heating fuel, gas, electricity, water, sewerage and garbage collection services.  Again, the "medical confinement" exception applies.

But don't confuse "shelter costs" with "home ownership".  It's OK for a special needs trust to owna house in which the SSI beneficiary lives.

By the way, the words "food" and "shelter" are usually accompanied by the word, "clothing".  But not in the world of SSI eligibility, as of 2005.  In other words, gifts of clothing to SSI beneficiaries are no longer a problem because it's not counted as income or in-kind support and maintenance.

Enhanced Prenatal Testing for Downs Syndrome

This morning I was flipping through the latest issue of MetDESK News, a newsletter produced by MetLife and designed to deliver information to the special needs community, and I was drawn to an article on the progress in prenatal testing for Downs Syndrome.

When my wife and I were pregnant with our first child the ultrasound revealed enough "markers" for the doctor to inform us that there was a 1 in 3 chance of our son having Downs.  We then resorted to an amniocentesis to get a definitive diagnosis.  This was done with deep reluctance on our part since there is a small, but not insignificant chance of miscarriage with such an invasive procedure.  But if we were about to embark on a challenging life with a special needs child we wanted as much time as possible to engage in some serious planning.  When the test came back negative it was impossible to articulate the sense of relief. 

I was also relieved to read this morning in MetDESK News about how some laboratories, including labs at Stanford University and Sequenom, Inc., are developing simple blood tests that can be administered in the first trimester of pregnancy and provide a definitive result.  No need for invasive diagnostic tests or vague numerical odds that make it impossible to sleep at night.  My wife and I would have felt absolutely blessed to have such a testing option nine years ago.

Click this to see the MetDESK News article: Download MetDESK Mar,Apr 2009

Special Needs Trusts and "Regular" Distributions

Special Needs Trustees beware!  It's vitally important for you to become familiar with the type of government benefit(s) your special needs beneficiary is receiving, particularly if they are the types of programs that have income limitations, such as Supplemental Security Income (SSI) and subsidized housing.

The income generated by the special needs trust may be taxable, but it is not considered as "countable" income for the special needs beneficiary.  But if you start making "regular" distributions to the beneficiary then you will have an income problem that will reduce government benefits or eliminate them altogether if the distributions are large enough.

The word, "regular" income, in the world of government benefits, is defined as distributions that are received on a periodic basis, at least two or more times per quarter or in consecutive months.  In contrast, "irregular" distributions are not periodic or predictable and should not cause a problem with benefits.

This type of income would reduce the SSI benefits dollar-for-dollar, less the $20 disregard (a topic for another post).  There would also be a problem if the special need beneficiary is living in federally subsidized housing since those programs have income limits.

Get the Right Kind of Special Needs Trust

Most of my clients who sit down to discuss estate planning for their special needs child are surprised to hear that there are actually two types of special needs trusts, one of them being much more appealing than the other.  The question of which one you need to use is based on the source of the trust funding.

If the trust is funded by assets that belong to the special needs child (usually by way of a personal injury settlement, or possibly an inheritance from a well-meaning relative) then it's called a "self-settled" or "D4A" trust, referring to the IRS code.  This is not an ideal situation because the law requires that the trust include a "pay-back" provision.  Such a provision states that upon the death of the special needs child the remaining trust funds must go to the State, up to the amount that the State has contributed towards the care of your child.  It essentially allows the State to get reimbursed and it's possible that you would not be able to have the money go to family members instead.  It depends on how much the State has helped out your child.

If the money going into the trust comes from a source other than the special needs child (presumably the parents and possibly other relatives), then it's called a "third party" special needs trust, and this is the type of trust that you want because you don't need a pay-back provision for the State.  Upon the death of your child, the remaining trust funds can go to family members, charities, churches or anywhere else you would like it to go.

So...if you have a special needs trust it's worth taking the time to review it and make sure that it doesn't have that pay-back provision unless it has to.  You'd be surprised by how many special needs trusts I review where the attorney unnecessarily included a pay-back provision.

The $100,000 Question in Special Needs Trust Planning

There are obviously many important considerations to ponder when designing an estate plan for a beneficiary who has special needs. But the most important issue in the planning process is picking the person or persons who will be in charge of managing the special needs trust. This person is known as the "trustee" and he/she has the biggest impact on whether or not the purposes of the trust are actually carried out after you pass away. Pick the wrong person and the whole plan can come crashing down, to the severe detriment of your disabled loved one.

Ideally, you want to have a trustee that is relatively stable and financially savvy since that person may be in charge of investing a great deal of money for your loved one. The trustee should also have a good relationship with the disabled beneficiary. If the trustee interacts with the beneficiary on a regular basis then he/she will have a better understanding of the beneficiary's disability and therefore better able to make appropriate distributions from the trust funds.

A sibling of the beneficiary is often appointed as the trustee in most cases (in the event that the parents are unable to act). This arrangement is usually entirely appropriate. But you should keep in mind that most special needs trusts will indicate that any remaining trust funds will go to the beneficiary's siblings upon the death of the beneficiary. In other words, less scrupulous siblings who have been made the trustee of their sibling's trust may be motivated to withold neccesary distributions to the beneficiary since doing so would water down their future inheritance. This issue is not unprecedented, so it needs to be considered before a sibling is appointed as the trustee.

Finally, you need to have a trustee that is prudent enough to strictly follow the instructions and limitations outlined in the trust language. If the State catches wind of improper distributions from the trust (such as distributions that pays for things that the State is already covering) then there is a risk that the benefits will be cut off.  Although this is a self-serving statement, you need a trustee who is wise enough to seek specialized legal guidance if the propriety of a particular distribution is questionable.

In short, you need to give long and serious thought as to who you will name as trustee of your special needs trust. The decision can make or break all of the careful special needs planning you have done.

Estate Planning for the Disabled: Special Needs Trusts (Part II)

So...what makes "Special Needs Trusts" so special?  It is, in a way, an opportunity for your disabled child (or non-child beneficiary) to have her cake and eat it too.  This is because the funds held in the name of the trust are there for the benefit of the child, yet it is not a "countable asset" when determining her eligibility for government benefits.  This allows a situation where the government benefits cover her basic needs while the special needs trust can pay for the "luxuries" (things that the government will not pay for), thereby maximizing her quality of life.  This is, of course, the ultimate goal of my special needs clients; making sure that their disabled child has the very best life possible if they are suddenly not there to help her out.

The restrictions are, first, that the child would have absolutely no control over the trust funds; she cannot write checks or make any type of withdrawal, make investment decisions or compel the trustee to make distributions.  The trustee has absolute and full discretion over what happens with the trust funds. 

Second, the trustee is given strict instructions in the trust language that he/she is not to make any distributions that would jeopardize government benefit eligibility.  That is to say that the trustee cannot duplicate any spending that the government is already doing on the disabled child's behalf.  So if the child is receiving Medicaid benefits then the trustee cannot pay for the basic medical costs that Medicaid covers.  If the trustee does so, then the State could say that government benefits are no longer needed since the trust is covering basic medical costs.

These trusts are, obviously, complicated estate planning documents.  My objective in this post and the previous post is to give you a very general overview of what special needs trusts are all about.  But stay tuned for future posts where I will get into the nitty-gritty details of these trusts, such as how to select a trustee, different types of special needs trusts and other important issues.

Estate Planning for the Disabled: Special Needs Trusts (Part I)

If you have minor or adult children (or non-child beneficiaries) who are either receiving government benefits currently, or may receive them in the future due to a mental or physical disability, then you need to know about special needs trusts.  These trusts are certainly important enough to spend the next two posts discussing them.

These types of trusts are much more well-known than they were just a few years ago, but I find that too of my clients are not familiar with them.  The most common disabilities among my clients' beneficiaries are conditions like autism, down syndrome, Alzheimer's and mental retardation, but special needs trust planning is usually vital regardless of what the specific disability may be.  If there is a chance that your beneficiary may not be able to support himself/herself if you are suddenly not there to help out, then you need to at least discuss special needs trusts with an estate planning attorney.

When we talk about government benefits for the disabled then we're usually talking about Medicaid (Title 19), which covers basic medical care, and SSI (Supplemental Security Income), which covers basic food, clothing and shelter needs.  These types of benefit programs have asset limitations: $1,600 in Connecticut for Medicaid and $2,000 for SSI.  In other words, anyone with assets that exceed these limits are ineligbile and must spend their assets down on their care until they are under the asset limits, at which point they can apply.

So...this means that if you leave an outright inheritance to a disabled beneficiary then you are likely doing them a disservice.  The inheritance will either render them ineligible for the government benefits they are already receiving or it will make it harder for them to qualify in the future because there are suddenly more assets that need to be spent down.

In tomorrow's post I'll explain how these important trusts operate and why they are usually the best option for disabled beneficiaries.