by Steve Goodman
CPA, MBA – President & Chief Executive Officer
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A Special Needs Trust (SNT) is a trust set up for the benefit of someone with a disability. Trusts must be irrevocable with no written requirement that the beneficiary receives the income from trust assets to qualify as an SNT. Technically, there are two types of SNT’s. The vast majority of SNT’s are Supplemental Care SNT’s. This article will focus on Supplemental Care SNT’s. These are trusts established to supplement any benefits the disabled person (the beneficiary) may receive from government programs. Federal law allows complying trusts to hold assets for the benefit of the disabled beneficiary without being counted as ‘available resources’ of the beneficiary. This allows the disabled beneficiary to maximize the benefits available through government sources. These benefits typically include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, and subsidized housing.
The lesser used SNT is the General Support SNT. A person uses a General Support SNT when he/she intends to fund all the beneficiary’s needs, including those that the government offers to pay for qualifying people. Even most people of means take the steps necessary to accept the government’s basic and supplemental care funds. The General Support SNT is a niche financial tool that only people of significant means might use but infrequently do.
Supplemental Security Income (SSI) is a federal program designed to assist people with low incomes and special needs. Medicaid is a healthcare program for low-income people implemented by the states. As a rule, if one can qualify for SSI, one can qualify for Medicaid. Therefore, SSI is the lowest hurdle that people need to meet to receive all possible government benefits.
To qualify for SSI, one must have less than $2,000 in his/her name. Each year, the federal government identifies a Federal Benefit Rate (FBR).In 2018, the FBR is $750 for unmarried people and $1,125 for married people. If one earns more than the FBR over the course of a year, one will not be eligible for SSI. Some state’s offer a supplementary SSI payment. The state supplement is not considered as income for FBR purposes.
Clearly, the amount of income and assets that a disabled person can have is minimal. Yet it is not the government’s intention to force all disabled people to live penniless all their lives. The solution is to allow Supplemental Care SNT’s to provide the disabled with the quality of life and non-basic needs financial assistance. These SNT’s may not pay for services covered by government sources.
A person is ‘disabled’ if he/she meets the definition of disabled per the Social Security Act. In general, a disabled person is one unable to engage in any substantial gainful activity due to a disability.
Within the Supplemental Care SNT category, there are three variations.
- A first party or self-settled Special Needs Trust. Assume a person receives a settlement from a medical malpractice case or an accident. The person can establish a first party SNT to hold the settlement for his/her benefit. When he/she dies, the first beneficiary is the state’s Medicaid program to reimburse for all costs incurred by the state in caring for the disabled person over his/her lifetime. If funds remain after repaying the state, then named beneficiaries receive the balance.
The disabled person must be under the age of 65 when the trust is established, and the person’s parent, grandparent or the court must establish the trust.
- A third party SNT is one not funded by the beneficiary. A parent or other close relative typically funds these SNT’s. There can be multiple donors to a third party SNT. Anyone but the beneficiary can donate to a third party SNT. The trust can hold any kind of asset; real estate, stocks, bonds, cash etc. Unlike a first party trust, there is no payback requirement upon the death of the beneficiary. Named heirs receive the trust funds upon the death of the primary beneficiary. There is also no age limit on when a third party SNT can be established.
- The third type of SNT is the pooled SNT. These trusts are managed by a charity or the state. Anyone except the beneficiary can contribute to a pooled SNT. For investment purposes, all assets are co-mingled, but each beneficiary has his/her own account. The charity, or state, takes a fee for managing the account. The fee can be assessed upon death or annually. Any remaining funds are used to pay back the state for care. There is no age limit on a pooled SNT. Pooled SNT’s save the cost of a trustee and the costs of setting up the trust.
SNT’s can use funds for a broad list of quality of life and medical and healthcare related services. This includes the following:
- Domestic help or personal assistants to assist with daily living activities.
- An attendant or respite care to allow the primary caregiver to take some time off.
- A customized van including the costs of maintaining, insuring, and the periodic replacement of this vehicle
- Additions or renovations to a beneficiary’s residence to render it accessible.
- The cost of assisted living or a ‘luxury’ skilled nursing facility.
Still, other allowed uses are more quality of life oriented:
- Appropriate recreational and vocational activities
- Hobbies and vacations
- Educational and training activities
- Augmentative communication equipment
- Professional services including attorneys, accountants, people to assist filing claims
- Purchasing and maintaining a pet
- Computers, clothing, and furniture
- Cell phone and internet service
The following areas will cause problems if SNT funds are used for these purposes. These uses can result in reductions in SSI benefits.
Careful record keeping is critical. The account trustee should be the one making the purchasing decisions for the benefit of the beneficiary. The beneficiary should not have direct access to the accounts to maintain the legality of the trust.
Putting Money in a Trust
A first-party trust makes the lump sum payment payable to the trust to fund it. Third party and pooled SNT’s typically fund with a modest gift to get the trust or account established. The balance of the funding is typically made from a will or revocable living trust. Many parents and relatives will fund the SNT with gifts while they are alive. When they die or become incapacitated, then the will or living trusts will fully fund the SNT in anticipation that they may no longer be capable of donating gifts.
Setting up an SNT
The high-level view of establishing an SNT is as follows:
- Create the trust document and have it notarized
- Obtain a federal tax ID for the trust from the IRS
- Fund the trust with a modest amount of cash
- Establish a bank account
Naturally, the process is more complex than a few easy steps. The wording is very important. An SNT must state that its purpose is to provide ‘supplemental and extra care’ beyond that provided by the government. It must affirmatively state that the trust is not intended to provide basic support. The trust should not include a Crummey Clause.It should reference the Social Security Operations Manual noting the specific parts of the manual that authorize the creation of a special needs trust. It must include required language concerning payback of Medicaid as applicable. It must explain the exception to the Omnibus Budget and Reconciliation Act. And the trust document should include a copy of relevant provisions from the United States Code.
One can use an online legal document service to set up a trust, but the cost of a mistake can be very high. Many estate planning lawyers and accountants will defer to a specialist when it comes time to create an SNT.
The trustee is the person or organization responsible for the administration of the SNT. It can be a complex job. A trustee is responsible for the following:
- Avoid any activities that appear to conflict with the purpose of the trust-enhancing the quality of life of the beneficiary
- Balance spending money to enhance the beneficiary’s life while preserving the length of the trust.
- Respond to the beneficiary’s need for goods and services not covered by Medicaid or SSI.
- Keep current with SSI and Medicaid rules as to not jeopardize the beneficiary’s access to those benefits.
- Invest and manage the trust assets following the terms of the trust and state laws for the beneficiary’s best interests.
- Communicate with the beneficiary and other interested parties concerning trust activities.
- Work with the beneficiary’s guardian or conservator if one has been appointed.
- Keep accurate records and prepare and file all federal and state require tax returns.
- Be prepared to represent the trust in any court proceedings
- Terminate the trust when conditions are appropriate for termination
- Distribute remaining property following the termination
- When hiring a professional trustee, it is recommended that the donor present the trustee with two documents. The first is a trustee’s duties letter. This letter will make the donor’s desires known concerning how the trust is to be managed and expected communications about the trust’s status. The other document is an introduction to the beneficiary. If the beneficiary is unable to communicate easily, the letter needs to provide detail about interests, history, preferred activities, and, of course, medical needs. If the beneficiary can communicate easily, it is a simple introduction prior to meeting the beneficiary.
Terminating an SNT
SNT’s typically terminate based on one of four conditions:
- The funds are depleted
- The beneficiary no longer needs government benefits
- The beneficiary is no longer eligible for government benefits
- The beneficiary dies
The trustee’s final jobs upon termination including filing the appropriate paperwork with federal and state authorities, and distributing the remaining assets, if there are any, to the appropriate heirs or beneficiaries of the trust.
Alternatives to SNT
In 2014, Congress passed legislation authorizing the states to offer ABLE (Achieving a Better Life Experience) accounts. These serve as SNT-lite accounts. Details are available in the ABLE Accounts article in the Estate Planning section of this website.
CPA, MBA – President & Chief Executive Officer
About Steve Goodman
For more than 30 years, Steven has provided insightful solutions to the challenges of business succession, wealth preservation and charitable planning, focusing on the needs of owners of closely held businesses and high net worth individuals.
He's been featured in the New York Times and is an accomplished speaker and has presented over the years to many organizations and professional groups on efficient business succession, estate planning issues and tax strategies. Steven is a CPA who was vice president of the Trust and Investment Division of JP Morgan Chase and a supervisor for KPMG Peat Marwick, and holds an MBA from Fordham University.