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).