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Special Needs Trusts

Different rules apply to special needs trusts depending upon who creates the trust. The rules discussed below apply to trusts created and funded by a person for the benefit of another and are substantially different from the rules that apply to trusts created by an individual for his or her own benefit.

When planning your estate, how do you provide for the needs of a disabled loved one without precluding him/her from eligibility for public benefit programs like Medicaid or Supplemental Security Income? In many cases, this can be accomplished either during your lifetime or at your death through a special needs trust.

A special needs trust can provide education, travel, furniture, furnishings, and even pay some utilities for the trust beneficiary, i.e. the person for whom the trust was created. A special needs trust, however, is generally not permitted to pay for food or housing on behalf of the beneficiary without affecting that beneficiary's eligibility for means-tested public benefit programs, but there are a number of complicated exceptions regarding home ownership and/or purchase by a special needs trust.

For example, rent-free shelter is often counted as income in the month received, however, if a trust owns a house outright, the following exception may apply:

An eligible individual does not receive in-kind support and maintenance (ISM) in the form of rent-free shelter while living in a home in which he or she has an ownership interest. Accordingly, an individual with “equitable home ownership under a trust” (see SI 01120.200F.1.) does not receive rent-free shelter. Also, because we consider such an individual to have an ownership interest, payment of rent by the beneficiary to the trust has no effect on the SSI payment.

POMS SI 01120.200F.2.

In order to create an effective special needs trust for the benefit of another, there are three issues that must be considered: 1) availability, 2) funding, and 3) payback.

1) Availability

The beneficiary of a special needs trust must not be able to compel a distribution of the trust assets or be able to revoke the trust. As such, the amount of discretion with which a trustee is endowed is often the dispositive factor in determining the unavailability of the assets. In short, if the trustee has complete discretion as to when a distribution will be made and the amount of the distribution, the trust assets will generally be considered unavailable.

2) Funding

Although this will have no effect on the beneficiary of a special needs trust, if the process of funding a special needs trust is not proper, the trust grantor, the person who creates the trust, will be subject to Supplemental Security Income or Medicaid transfer penalties. This occurs when the grantor is himself/herself a recipient of public benefit programs. For example, if an elderly woman establishes a irrevocable special needs trust for her disabled son, that woman will be ineligible to receive Supplemental Security Income for a period of time. In particular, if an irrevocable trust is created and funded during the lifetime of the grantor, a penalty will be imposed on the grantor making him/her ineligible for public benefits for a period of time relative to the amount transferred.

However, if the trust is either revocable or funded at the death of the grantor, the funding of the trust will not trigger Supplemental Security Income or Medicaid penalties.

3) Payback

At the death of the trust beneficiary, special needs trusts created for the benefit of another are not required to reimburse public benefit programs for payments which were made to, or on behalf of, the trust beneficiary; rather, the principal of the trust may be distributed to a person specified in the trust, a remainderman.

Despite the formalities required to create a special needs trust, the advantages of doing so often far outweigh any hassle the formalities cause.

This article is for general information only.  The applicable tax law, state laws and the documents governing loan transactions are complex and require the assistance of a professional. 

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