What is a “third party” special needs trust?

When someone uses his or her own money to set up a special needs trust (SNT for short) for another person, that’s called a “third party” SNT.

It’s the best kind of SNT for two reasons.

First, unlike a “first party” or “self settled” SNT (established with the beneficiary’s own funds) a third party SNT does not have to be a “payback” trust. A first party SNT must provide that when the beneficiary dies, any remaining funds in the trust have to go to the state to pay back any Medicaid costs paid for the beneficiary. Only after the SNT pays back those costs can any remaining funds go to other beneficiaries.

But a third part SNT can leave remaining funds to others with no payback requirement.

Here’s an example. Mary has one disabled child, Eric, and two others who are not disabled. She decides to leave, say, $100,000 to Eric. If Mary leaves the money to Eric outright, he could arrange to have it placed into a payback trust. If $40,000 remained in that trust when Eric died, the rest would go first to pay back any Medicaid costs the state paid for Eric while he was alive. If there was anything left after paying the state, the remainder could go to Mary’s other two children.

But if Mary’s will established a SNT for Eric, that would qualify as a third party trust. If $40,000 remained when he died, the entire amount could pass to Mary’s other two children.

Second, a third party SNT is easier to establish. A competent person wishing to establish a SNT for another person can simply sign the trust document.

On the other hand, a person wishing to set up a first party SNT with his or her own money cannot just go ahead and do that. For some unknown reason, the law requires a parent, grandparent, legal guardian, or court to establish the trust for such a person. That requirement can pose a difficult hurdle, and require additional legal expense, if the parents and grandparents are deceased or incapacitated, or there is no legal guardian.

Third party trusts require advance planning, but they’re worth it.

What can a special needs trust pay for?

You may know that a special needs trust generally pays for the supplemental needs of the disabled, in order to preserve access to means-tested public benefits.

But what are those supplemental needs?

Commonly paid items

Below is a list of items that are often paid for by special needs trust.

Education – tuition, tutors, books, supplies

Computer, printer, internet, technological support

Home care, if not paid by another program

Phone or mobile phone, voice and/or data plan

Entertainment

Cable TV

Clothing (wasn’t always allowed to be paid for, but has been since 2005)

Medical supplies and equipment, such as wheelchairs, hearing aids, etc.

Eyeglasses

Vacations, including tickets or other travel charges, hotel

Companionship

Exercise and physical therapy equipment

Furniture

Health insurance premiums

Life insurance premiums

Household supplies and cleaning products

Tools used for home repair and maintenance

Dental costs

House and vehicle

Two items that raise more complicated questions are the purchase of a house and a vehicle. Both may be beneficial and even necessary, and can often be purchased with funds from the trust. However, keep in mind that the purchase of such items raises complex questions of title and ownership, upkeep, insurance, and contribution by other family members.

Important caveats

Keep in mind that this list is not comprehensive. There any number of other items that will not reduce benefits and could be paid for by a special needs trust.

Check the terms of the trust. Even if an item is on this list, make sure the trust document itself allows the expenditure.

The general rule is that a special needs trust pays for items other than food and shelter. Such items could be paid for, but the purchase raises the issue of “in kind support and maintenance,” also referred to as ISM, which can reduce benefits. There may be reasons why the trust should make ISM payments, but that is a complicated topic for another blog post.

Check the rules of your local jurisdiction. Some states have rules that are more restrictive than others.

And of course, it’s best to seek competent professional advice before making distributions from a special needs trust. (Corporate trustees such as banks, trust companies, and nonprofits that are approved for handling special needs trusts, often serve as trustees of special needs trusts, rather than a family member or friend, because of the legal complexity.)

New Medicaid figures announced

Several figures used to calculate income for spouses of Medicaid applicants have risen slightly, the Pennsylvania Department of Public Welfare announced.

When calculating a spouse’s monthly maintenance needs allowance, the Department uses standard utility figures. The heating standard is used when the spouse’s heating and cooling costs are billed separately from rent or mortgage costs. When the spouse pays separate utility costs other than phone, but not heating or cooling costs, the Department applies the non-heating standard. When the spouse’s only separate utility cost is for phone charges, the telephone standard is used.

The latest figures are:

Heating: $536/month

Non-Heating: $278/month

Telephone: $33/month 

These figures are all part of a formula used to determine the needs allowance. Though announced recently, they are effective back to October 1, 2011.

You can always find the most current Medicaid numbers at this page of our website.

National Estate Planning Awareness Week

The third week in October is National Estate Planning Awareness Week, as designated by the U.S. House of Representatives. (H. Res. 1499 2008)

In its resolution, the House noted that “over 120 million Americans do not have up-to-date estate plans to protect themselves or their families in the event of sickness, accidents, or untimely death;

“…two-thirds of Americans over age 65 believe they lack the knowledge necessary to adequately plan for retirement, and nearly one-half of all Americans are unfamiliar with basic retirement tools, such as a 401(k) plan;

“…careful estate planning can greatly assist Americans in preserving assets built over a lifetime for the benefit of family, heirs, or charities;

“…careful planning can prevent family members or other beneficiaries from being subjected to complex legal and administrative processes requiring significant expenditure of time, and greatly reduce confusion or even animosity among family members or other heirs upon the death of a loved one;

“…the implementation of an estate plan starts with sound education and planning, and then may require the proper drafting and execution of appropriate legal documents, including wills, trusts, and durable powers of attorney for heath care…”

You can find out more about estate planning at this blog and at many other reputable sites, including Elder Law Answers and the National Academy of Elder Law Attorneys.

What is a “self settled” special needs trust?

A “self settled” special needs trust is a particular type of special needs trust (SNT). In this post I’ll explain what it is, and when and how it is used. (For an explanation of SNTs in general, read this prior post.)

First, some terminology. A self settled SNT is also called a “first party” SNT or a “payback” trust or a “(d)(4)(A) trust” after the U.S. Code section (42 U.S.C. § 1396p(d)(4)(A)) that exempts it from being counted as a resource that would disqualify the beneficiary from certain types of public benefits (more on that shortly). The “beneficiary” is the person for whom the trust is created.

It’s called a first party or self settled trust because it is created using funds the beneficiary has or may soon receive. The two most common examples are lawsuits and inheritances.

Lawsuit. Sidney has permanent brain damage after a careless driver struck him in a crosswalk. He can no longer work and survives on his Supplemental Security Income (SSI) and has medical benefits through Medicaid.

His lawyer reaches a settlement with the defending insurance company that will net Sidney about $400,000. If Sidney received the money outright, he would lose his monthly SSI payments and (perhaps more importantly) his Medicaid health coverage because both programs limit the amount of assets a person can own and still qualify for benefits.

But if the money funds a SNT for Sidney, he can keep his benefits. The SNT can then pay for other items that will help Sidney throughout his lifetime.

Inheritance. Tilly has had mental impairments since birth. Like Sidney, she is unable to work and gets by on SSI and Medicaid.

Her loving grandmother remembered Tilly in her will. Grandma recently died and Tilly stands to inherit $200,000. Though Grandma was well intentioned, she didn’t realize that it would throw Tilly off benefits to receive a $200,000 check.

A self settled SNT for Tilly provides the solution. By receiving distributions from the trust for the rest of her life, Tilly can benefit in many ways from Grandma’s generosity.

Payback requirement. Unlike some other types of SNTs, a self settled SNT must contain a “payback” provision. That is, the trust must provide that upon the death of the beneficiary, any funds remaining in the trust will pay back the state for whatever Medicaid costs the state paid on the beneficiary’s behalf.

In some cases, a payback requirement may make little difference. Take Tilly for example. If she is young enough, and has enough needs that can be met through the trust, its funds may be exhausted when she dies.

But if the amount were larger, or Tiller were older, or had few needs, a sizeable balance could remain when Tilly dies. Here’s where better planning on Grandma’s part could have helped. If Grandma’s will had said that Tilly’s $200,000 would go into a special needs trust, the law would have considered that a “third party” SNT. Unlike a first party trust, a third party trust does not require a payback provision. Grandma could have left the remainder upon Tilly’s death to her other grandchildren.

Age requirement. Another requirement of a self settled SNT is that the beneficiary must be under age 65 when the trust is created. If a disabled plaintiff or heir is approaching age 65, act quickly.

If a potential beneficiary is 65 or older, a “pooled” SNT could be an alternative. In Pennsylvania, state law purports to limit all SNTs to those under age 65, but a federal court recently ruled that requirement invalid as applied to pooled trusts. (The state has appealed the ruling.)

Creation. Here is an interesting technicality that sometimes causes confusion. You would think that the beneficiary of a so-called “self settled” or “first party” would be able to create the trust himself. But you would be wrong. No, a parent, grandparent, legal guardian or court must create this type of trust. Often a court is already involved, handling the estate that creates the inheritance or the lawsuit brought by the beneficiary, and a lawyer asks the judge to authorize creation of the SNT. Oddly, no one seems to know the reason for this creation requirement. Maybe someday Congress will eliminate it since it has no apparent purpose and just causes extra work (and sometimes legal expense).