Administering a Special Needs Trust and Its Impact on SSI

By: Bridget O’Brien Swartz, Esq., Vice President and Sr. Trust Officer, Camelback, Ariz. branch, First International Bank & Trust

Prior posts have defined a special needs trust (SNT) and who can benefit from one and explained the difference between first and third party in SNTs.

This post focuses on what most interests people: how a SNT can be used to benefit the individual with special needs.

SNTs fill the gap
What often comes to mind is that SNTs are intended to supplement and not reduce or supplant the public benefits for which a beneficiary is eligible.

The trust itself is hopefully crafted in such a way that the assets held in the trust are not treated as available to the beneficiary for purposes of his or her financial eligibility for public benefits.  The Settlor (the person who establishes the trust) hopes that the beneficiary will remain eligible for public benefits and that the trust will provide for those items and services that public benefits do not cover; in other words, that the trust will fill the gap to help improve the beneficiary’s quality of life.

Deciphering SSI, SNT, Medicaid
The two primary public benefits for which an individual who is disabled may qualify are cash assistance through the Social Security Administration, such as Supplemental Security Income (SSI) and medical assistance through Medicaid.  This post will focus on SSI benefits.

The federal maximum benefit rate for SSI is $710 per month in 2013 and $721 per month in 2014.  This benefit is intended to provide for a disabled individual’s support needs.  It is often insufficient to cover such needs, considering rent or mortgage, maintaining real property the individual may own (which is an excluded or exempt asset for SSI and Medicaid eligibility purposes), utilities, food, and other incidentals.

Many who create a special needs trust are under the misimpression that a disabled individual’s support and maintenance are not “special needs” and, therefore, may not be provided for by a special needs trust.  If a special needs trust is drafted in such a way so as not to prohibit or disallow distributions to provide for such needs, then it certainly can be used to do so.

Guiding principle: Don’t say you can’t and don’t say you can
If a special needs trust, or any third party for that matter such as a parent, provides for an SSI-eligible individual’s support and maintenance needs, then the SSI benefit will be reduced, likely by one-third (1/3) as long as the distributions or payments are being made directly to the vendor or provider rather than cash being given directly to the beneficiary to pay such expenses.

Is this permissible?

Yes, as long as the language of the trust does not restrict the ability to use trust funds to provide for maintenance and support, and does not admonish the trustee from making distributions that may “reduce or supplant” benefits.

Should these distributions be made?

In many cases, yes, since SSI is typically insufficient to cover an individual’s support expenses.

Learn by example
By way of example, let’s say an SSI-eligible individual’s rent and utility expenses are $750 per month and food expenses are $250 per month. SSI of $710 per month will obviously not meet the expenses. If the individual were a beneficiary of a special needs trust, the trust could pay the rent and utilities directly, which would result in a reduction of the individual’s SSI from $710 to $473 per month. The individual need not pay his or her rent or utility expense with the remaining SSI benefit, and has sufficient funds to provide for his or her food needs, and then some. He or she also has the opportunity to improve his or her living arrangement as the additional expense could be paid directly by the special needs trust.

Two key points on administration
We’re always happy to guide you through SNTs. Meanwhile, here are two key points on administering SNTs:

-        Make sure your special needs trust is not overly restrictive and is drafted so the trustee can make distributions to provide for the beneficiary’s support. This may reduce benefits, if that is in the beneficiary’s best interest.

-        Don’t assume that SSI on its own will support the individual. Use the special needs trust to improve upon his or her living circumstances and free up the SSI benefit (even though it may be reduced) for the beneficiary to spend in his or her discretion.

Bridget O’Brien SwartzBridget is originally from Duluth, Minnesota, earned her undergraduate degree from Notre Dame, then and her law degree as well as a Masters in Public Administration from ASU.  She has been a specialist in Estate & Trust Law certified by the State Bar of Arizona and a Certified Elder Law Attorney certified by the National Elder Law Foundation.  She remains actively involved in national attorney organizations such as National Academy of Elder Law Attorneys and the Special Needs Alliance.

Special Needs Trust: A critical distinction between first and third party

By: Bridget O’Brien Swartz, Esq., Vice President and Sr. Trust Officer, Camelback, Ariz. branch, First International Bank & Trust

Last month, we defined a special needs trust (SNT) and who can benefit from one.  Read that blog post.

We discussed the various terms of art in referring to such a trust, such as  special needs trust, special treatment trust (in AZ), discretionary supplemental care trust, or supplemental trust.  What a trust is called does not tell you its purpose, and how it is administered or managed.   So, it is very important to read beyond the name of the trust.  A trustee must read and understand a trust’s terms to best administer or manage it; when it comes to SNTs, the source of funding of the SNT should be identified.

What do we mean by “source of funding?”

What we’re trying to get to the bottom of is who funded the trust; in other words, whose assets went into the trust.  It’s often mistakenly assumed, that the grantor or settlor who established the trust  is also the individual who funded the trust.  That is not always the case, and in the case of SNTs (as well as for tax reasons), this is a critical distinction.

First party Special Needs Trust

If a beneficiary’s own assets funded the SNT, then it is a first party or self-settled SNT, regardless of who or how it was established.  In fact, federal law does not permit a beneficiary to establish his or her own SNT.  The law requires that a SNT funded with the assets of an individual who is disabled be established by a parent, grandparent, guardian, or court of law.  If the SNT is funded with the assets of an individual who is disabled and also the beneficiary, then certain requirements must be met under federal law, and in many jurisdictions, also state law, Arizona being one such state.

The requirements within the federal law fall under 42 U.S.C. § 1396p(d)(4)(A) and are as follows:  (1) The beneficiary must be under the age of 65 at the time the trust is established; (2) the beneficiary must be disabled; (3) the trust must be established by a parent, grandparent, guardian or court of law; and (4) the trust must state that at the time the trust is terminated, Medicaid will be reimbursed up to the cost of medical services provided to the beneficiary.  As mentioned above, additional requirements may apply under state law.  In Arizona, the law and regulations set forth what disbursements from the trust are allowable, and which are prohibited.

Special Needs Trust

Third party Special Needs Trust

A third party trust is one that is funded with the assets of someone other than the beneficiary.  This type of trust can be established and funded by anyone.   It’s often established by a parent for the benefit of a child who is disabled, and funded when the parents pass away with assets from their estate.  But the trust can be established by any relative or a friend, and does not need to be primarily funded with the assets of the same individual who established it.  Some states require nominal funding by the individual who established the trust in order to consider it viable.

Third party SNTs are not a creature of federal or state law; although some jurisdictions do have statutes that impose requirements regarding third party SNTs.  Arizona is not one of those states.  Much more flexibility exists in how a third party SNT is drafted and administered than is the case with respect to a first party SNT.  Most importantly, a third party SNT is not required to contain a provision that provides for reimbursement to Medicaid on termination of the trust, which is typically at the time of the beneficiary’s death.  If assets remain at that time, the grantor or settlor can direct to whom those remaining assets are to be distributed.

So, now we’ve covered what is a special needs trust, who needs a SNT or can benefit from it, and the critical distinction between first and third party SNTs.  What else are you interested in hearing about? Leave a comment, please.

Bridget O’Brien SwartzBridget is originally from Duluth, Minnesota, earned her undergraduate degree from Notre Dame, then and her law degree as well as a Masters in Public Administration from ASU.  She has been a specialist in Estate & Trust Law certified by the State Bar of Arizona and a Certified Elder Law Attorney certified by the National Elder Law Foundation.  She remains actively involved in national attorney organizations such as National Academy of Elder Law Attorneys and the Special Needs Alliance.

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What is a special needs trust? Do I need it?

By: Bridget O’Brien Swartz, Esq., Vice President and Sr. Trust Officer, Camelback, Ariz. branch, First International Bank & Trust

If you have a family member or loved one with special needs and/or a disability, you understand the importance of special care and careful planning. To protect and not jeopardize government benefits, consider setting up a special needs trust. More on special needs trust services.

Defining a special needs trust

First, “special needs trust” is a broad term. This type of trust account may also be called a “supplemental trust,” “discretionary supplemental care trust”, or, in Arizona (if self-settled), “special treatment trust.”

How a supplemental trust account helps

This trust allows you to set aside money or property for the benefit of a beneficiary with disabilities/special needs. Without it, that person could lose his or her eligibility for Supplemental Security Income (SSI) and Medicaid benefits. A special needs trust, whether one that stands alone or is incorporated into your will, allows you to avoid some of these potential problems.

How a special needs trust works

Basically, you are leaving property or money to a special needs trust, where it benefits your loved one. The trust is typically managed by an independent third party, which may be a family member, friend or professional trustee. He or she has complete discretion over the trust and is in charge of spending the money on behalf of your loved one.

Benefits for basic care

The primary purpose of establishing a special needs trust is to enable the beneficiary to remain eligible for needs-based public benefits, while having funds available to supplement the benefits that the government is providing and enhancing the beneficiary’s quality of life.

In most instances, public benefits are not enough to provide for an individual’s basic support needs let alone those needs that are not covered or provided for by public benefits.

Since your loved one does not control the money, it is not treated as part of program eligibility according to SSI and Medicaid administrators. The trust ends when it is no longer needed, usually when the beneficiary passes away or when the trust funds have been used.

Critical details

An important distinction in a special needs trust is whether it is a first or third party trust. 

Next up

Our next blog post will be a more in-depth discussion of the distinction between and treatment of first vs. third party special needs trusts.

Bridget O’Brien SwartzBridget is originally from Duluth, Minnesota, earned her undergraduate degree from Notre Dame, then and her law degree as well as a Masters in Public Administration from ASU.  She has been a specialist in Estate & Trust Law certified by the State Bar of Arizona and a Certified Elder Law Attorney certified by the National Elder Law Foundation.  She remains actively involved in national attorney organizations such as National Academy of Elder Law Attorneys and the Special Needs Alliance.

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