Written by Jill Roamer, J.D. & Marcheasa Minium, J.D.
Trusts are certainly not the most perspicuous of legal inventions, but they can be a critical part of any family with a loved one with special needs. Experienced professionals understand the nuances of the various types of trusts available, what language is necessary, and which trust would benefit a client in a given circumstance. But for those of us who need a little refresher, let’s get back to the basics and take a dive into some of the lingo and concepts of special needs trusts.
What are Special Needs Trusts?
A special needs trust is a type of trust specifically used for special needs planning. This trust allows a beneficiary to preserve access to public benefits while being able to benefit from trust assets on some level. As with all trusts, the Trustee manages trust assets for the benefit of the beneficiary.
What about distributions during the lifetime of the beneficiary? The trust can be designed where the Trustee can only make distributions that supplement government benefits, a supplemental distribution standard. One thing to keep in mind is that even if there is a supplemental distribution standard in the trust document, that standard really is discretionary if the beneficiary is not currently on public benefits. The trust document dictates that once the beneficiary is on public benefits, distributions may not supplant, impair, or diminish those benefits.
Or, the trust can be designed so that the Trustee can also make distributions that supplant government benefits, a supplemental and discretionary distribution standard. To supplant government benefits means to replace or decrease those benefits. So, the Trustee may distribute trust assets, knowing that the distribution could decrease the amount of government benefits received by the beneficiary, if it is in the best interest of the beneficiary. And, of course, the Trustee can also make supplemental distributions.
A first-party special needs trust, also referred to as a d4A trust (due to its location within the US Code), is a self-settled trust. This type of trust is funded with the assets of beneficiary, who is also the applicant of government benefits. The assets are used for the beneficiary’s personal benefit only. To curtail a Medicaid transfer penalty, this individual must be under the age of 65 when the trust is established and the individual establishing the trust must be either the beneficiary; a parent, grandparent, or legal guardian of the disabled beneficiary; or a court. If the individual is over age 65, a transfer penalty may be imposed when applying for certain long-term care Medicaid benefits.
The state must be the remainder beneficiary of any funds remaining in the d4A trust after the death of the beneficiary, up to the amount the state expended on benefits for them. In some states, the specific state Medicaid agency must be listed in the trust agreement. For most states, however, it is sufficient to give a generic reference to the state in the payback provision. After any government agencies are repaid for benefits received, any remaining trust assets is distributed to residuary beneficiaries.
A typical client that may benefit from a d4A trust would be one that has assets to preserve while still desiring to qualify for benefits. Maybe this client won an award or settlement and was already on public benefits and would like remain on those benefits. Maybe this client was the recipient of an inheritance and doesn’t want their new found wealth to disqualify them from benefits.
A subset of the d4A trust is one with a Medicare Set-Aside (MSA) sub-trust. This MSA is oftentimes required when there is a personal injury or worker’s compensation settlement. Medicare has an interest in preserving a certain amount of the proceeds of the settlement so they aren’t dissipated while Medicare is left paying for future medical expenses. So, a requirement of the settlement agreement may be to set aside a certain amount of the funds for future medical bills that Medicare would otherwise be forced to cover.
A third-party trust special needs trust, also known as a supplemental needs trust, is a trust funded by assets that belong to someone other than the beneficiary. This type of trust is not specifically authorized by US Code; there are no age limits for this type of trust to curtail a Medicaid transfer penalty. However, if the beneficiary has the power to revoke, terminate, or sell the trust for their own benefit, then it is a countable resource for Medicaid purposes. Otherwise, it is usually exempt. And because the assets used to fund the trust never belonged to the beneficiary, a payback provision is not required.
A common client scenario for a third-party SNT would be an individual with means who would like to set aside money for the care of a disabled friend or family member. This can be done during the lifetime of the donor or as a part of their estate plan. A typical estate plan usually contains contingent special needs trust provisions which direct the share going to a beneficiary who is on public benefits into a third-party supplemental needs trust.
A pooled trust, found in the US Code under 1396p(d)(4)(C), is also known as a d4C trust. It is established and managed by a charity or non-profit organization and is funded by the disabled person, for that individual’s sole benefit. The fundamental idea is that an individual’s trust is a subaccount within a master trust, a collection of other individual trusts. The managing entity oversees the collective individual trusts within the pool as a whole. The arrangement minimizes expenses for the individual trusts. This type of trust may need a payback provision, depending upon the particular trust’s joinder agreement and may have age limits, for pre- and post-age 65 transfers, depending upon state law. A typical client may be one with minimal assets to fund into the trust, so that a traditional d4A trust would be fiscally unreasonable.
Sole Benefit Trusts
A sole benefit trust, authorized by subsection 1396p(c) of the US Code, is a hybrid trust. This type of trust is used to preserve the assets of a Medicaid applicant. The grantor funds the trust for the benefit of a disabled person under age 65 – or for a disabled child or spouse of any age – typically without suffering from transfer penalties for those transfers. This trust is often used as a life preserver during Medicaid crisis planning.
Of course, the rules of a particular state may have restrictions or create additional requirements for a sole benefit trust. In some states, a payback provision may not be required if the trust is actuarially sound – a model explained in a previous ElderCounsel blog. Typically, the sole benefit trust must either pay out all assets within the beneficiary's life expectancy, be payable to the beneficiary's estate upon death, or include a payback provision reimbursing the state.
Nickerson Law specializes in special needs trusts and is more then happy to walk through the various types that could benefit your loved ones. Click on the button below to get into contact about how we can provide your family a bright and safe future.
Written by Robert Nickerson
It’s February, which means that for a lot of people, love is in the air. Valentines Day is more then a sweetheart’s day. It’s become something like Christmas to show how much effort we put into the people we love. This is why the holiday isn’t restricted to couples; I’ve seen plenty of gifts, flowers and cards from parents to their children and vice versa. Back before my lovely lady became my special one, I used to get cards from my mother every February fourteenth to remind me that I’m always loved (which I still like getting, I love you mom!). So I challenge you; how much do you care about your loved ones? A significant other? Your children? Your close family? Your friends? This is another reason why Galantine’s Day is also become popular for the single ladies out there. The day has become about the care for everyone. So I also ask you; have you considered putting your love into an estate plan?
This is one of the greatest gifts your could give to someone. True, it doesn’t have the same smell as a dozen roses nor does it have the sweet taste of a chocolate assortment. But what it does is ensure that your future will be secure. Your loved ones will be able to rest easily when the worst case scenario happens when your no longer around. I didn’t want to make this Valentines Day subject grim, but it’s important to highlight the dark before walking into the brightest of days.
According to a 2021 Gallup Poll, even with the Covid 19 pandemic, 46% percent of adults had no will of any kind. Though it only remains a small part of an estate plan, it still legally states how your assets (both physical and financial) will be distributed following your death. It also went into detail about how those that do have wills are mainly over the age of sixty-five. In this day and age, sixty-five may seems like nothing, but there’s still a large window beforehand in case something should happen. What’s worse is that without a will, a court will end up making the decisions in probate court. This will result in your family being forced to fritter their time, hoping that the appointed conservator will make the right choice. The same percentage number applies to adults who have a living will. I bet your thinking that they were the same thing. You’d be surprised to learn that a living will and an ordinary will are two different things.
A living will is like a healthcare directive; something that legally states what you want done to you when you cannot communicate in any fashion. The fact that this poll says few people have this is shocking. Especially when it also reveals that 25% of adults have had to made end of life decisions. This is one of the hardest things to think about when you have no clue what the other party wants.
So for this Valentines, consider taking a conservative approach to your loved ones and have them look at your current estate plan to see if it’s still that route you want to take. If you don’t have a plan in place, then it’s time to consider having a full document created. Some of the things that will come with an estate plan include:
The letter of instruction may as well be your most important love letter you compose. It may be scary, but its also essentially you communicating with your family.
All of this may seem very daunting, but the Nickerson Law Office is more then happy to explain in a simple manner on what the steps are. We can go through your current estate plan and advise how it needs to be updated or we can even help create a new one from the ground up. Click on the button before to contact us for more information. Absolutely no obligation.
Regardless, remember that your loved ones are the most important element in your life. Have a Happy Valentines Day and make it a lovely one.
Jeffrey C. Nickerson - Estate Planning Attorney - My Passion is Special Needs Planning!