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What is a “third party” special needs trust?

October 31, 2011

Filed under: Special Needs Featured Posts,Special Needs Trusts — Andrew Sykes @ 4:26 pm

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?

October 29, 2011

Filed under: Special Needs Featured Posts,Special Needs Trusts — Andrew Sykes @ 4:27 pm

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


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.


Vacations, including tickets or other travel charges, hotel


Exercise and physical therapy equipment


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

October 28, 2011

Filed under: Medicaid Planning — Andrew Sykes @ 4:27 pm

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

October 17, 2011

Filed under: Estate Planning — Andrew Sykes @ 4:29 pm

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?

October 15, 2011

Filed under: Special Needs Featured Posts,Special Needs Trusts — Andrew Sykes @ 4:30 pm

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).

New probate petition form required

October 13, 2011

Filed under: Estate & Trust Admin Featured Posts,Estate Administration — Andrew Sykes @ 4:34 pm

The Supreme Court of Pennsylvania has adopted a new form to be used in opening probate estates.

The new form is not radically different from the current form, but in my opinion it is an improvement. It arranges information in a clearer, more logical fashion.

Use of the new form will be required beginning November 10, 2011.

The new form can be found here.

The Supreme Court’s order adopting the new form can be found here.

Finding a personal injury lawyer

October 9, 2011

Filed under: Elder Law - General — Andrew Sykes @ 4:34 pm

We don’t like to think about it, but it happens. Someone is careless, negligent, or worse – and you (or someone you love) get hurt. Maybe quite seriously.

The elderly are as vulnerable as anyone else to falling victim to serious injury and they often experience longer lasting consequences because they don’t bounce back as quickly.

If it’s something minor, take my advice: don’t bother with a lawsuit. You don’t want the hassle of litigation for something trivial. Life is too short.

But if it’s a death or major, lasting injury, then give some serious thought to standing up for your rights. You may suffer the consequences of your loss or injury for years. Financial compensation often won’t make up for what you’ve lost but it can help ease the way.

So who do you call? Are all personal injury lawyers the same? How do you find someone who will stand up for your rights and fight to get what you deserve?

Here are my tips for finding the right PI attorney.

Expertise. Just as lawyers usually specialize in one area (criminal, bankruptcy, patents, etc.), PI lawyers often have more expertise or experience dealing with certain types of injuries. As I reflect on the PI lawyers I’ve known and referred clients to over the past 22 years, I know that there are some I would prefer to call if I were injured in an auto accident, others for medical malpractice, nursing home injury, defective products, and so on.

Some lawyers focus their practice in one area because they are particularly good at it or they’ve had success in it. For others, it’s a matter of economics. If I’m going to take a lot of medical cases, the thinking goes, I should hire a full-time nurse to review cases, which in turn means I should take more medical cases to fill up the nurse’s time.

Other times, it was simply by chance that early in a lawyer’s career a number of, say, Social Security disability cases came her way and she became known for winning them.

Whatever the reason, I think it’s wise to look for an attorney who has expertise dealing with the type of case you have.

Chemistry. Hiring a lawyer is a lot like starting any relationship. You have to have good chemistry for it to work.

Let’s say you talk to Atticus Finch about taking your case. (For trivia buffs, Atticus is the fictional lawyer featured in Harper Lee’s To Kill a Mockingbird.)

Do you like Atticus and feel you could get along with him? Do you trust him and feel he has integrity? Does he seem to care about you and your circumstances? Does he still have passion for what he does or do you sense the years have left him jaded or burned out?

You could be with the lawyer you hire for the months or years your case lasts and your relationship will likely be tested. It helps if you start out having a good bond.

Reputation. Picking a lawyer on the basis of reputation among peers is much more reliable than picking on the basis of, say, who has the best advertising.

Reputation not only indicates quality, but also helps in getting the best outcome. If defense lawyers and insurance companies know a lawyer is not afraid to take a case to trial, and frequently wins high awards from juries, then they are more likely to offer higher settlements to that lawyer.

You also want to look for someone who has a reputation for hanging tough in negotiations. Let’s face it – some lawyers cave in early because they just want a quick settlement or don’t want to prepare for trial. Look for someone who has a reputation for believing in their clients and not selling them short.

Referral. If you know someone who is familiar with plaintiffs’ lawyers in your area, and knows their reputations, ask for a referral. When I’m asked to make a referral, I take great care in that choice because I want the client to get the best possible outcome, and I know choosing the right lawyer is one of the best ways to do that.

Ruling eases Pennsylvania’s restrictions on pooled special needs trusts

October 6, 2011

Filed under: Special Needs Trusts — Andrew Sykes @ 4:32 pm

When Pennsylvania enacted a law in 2005 placing restrictions on the use of special needs trusts, many of us who practice in this field felt the restrictions went too far and violated federal law.

A federal judge recently issued the first ruling striking down some of those restrictions. (Lewis v. Alexander, 2011 U.S. Dist. LEXIS 95109, August 22, 2011.)

Pennsylvania has appealed.

Here is my take on the ruling.


A special needs trust helps a person with disabilities by making funds available to pay for goods and services that will enhance quality of life. Such a trust can also preserve access to “means-tested” public benefits, such as Medicaid or Supplemental Security Income (SSI), that are available only to those who own very little in assets.

Federal law provides that some types of special needs trusts will not count as assets for purposes of determining eligibility for means-tested benefits programs, as long as those trusts meet certain requirements. One example is the “pooled” special needs trust.

In order to be non-countable as an asset for means-tested benefits programs (and therefore not interfere with eligibility) a pooled trust must meet these requirements under federal law:

(1) The trust is established and managed by a non-profit association.

(2) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts.

(3) Accounts in the trust are established solely for the benefit of individuals who are disabled. They must be established by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.

(4) To the extent that amounts remaining in a beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust must reimburse the state for any Medicaid payments made on the beneficiary’s behalf.

(Paraphrased from 42 U.S.C. § 1396p(d)(4)(C).)

After this federal law had been on the books for about 12 years, Pennsylvania in 2005 passed a law that added more requirements. The relevant parts read:

“(b) A special needs trust shall comply with all of the following:

(1) The beneficiary shall be an individual under the age of sixty-five who is disabled, as that term is defined in Title XVI of the Social Security Act.

(2) The beneficiary shall have special needs that will not be met without the trust.

(3) The trust shall provide:

(i) That all distributions from the trust must be for the sole benefit of the beneficiary. (ii) That any expenditure from the trust must have a reasonable relationship to the needs of the beneficiary.

(iii) That, upon the death of the beneficiary or upon the earlier termination of the trust, the department and any other state that provided medical assistance to the beneficiary must be reimbursed from the funds remaining in the trust up to an amount equal to the total medical assistance paid on behalf of the beneficiary before any other claimant is paid: Provided, however, That [sic] in the case of an account in a pooled trust, the trust shall provide that no more than fifty percent of the amount remaining in the beneficiary’s pooled trust account may be retained by the trust without any obligation to reimburse the [Department of Public Welfare].

(4) The department, upon review of the trust, must determine that the trust conforms to the requirements of Title XIX of the Social Security Act, this section, any other State law and any regulations or statements of policy adopted by the department to implement this section.

(c) If at any time it appears that any of the requirements of subsection (b) are not satisfied or the trustee refuses without good cause to make payments from the trust for the special needs of the beneficiary and, provided that the department or any other public agency in this Commonwealth has a claim against trust property, the department or other public agency may petition the court for an order terminating the trust.”

62 Pa. Stat. Ann. § 1414.

What’s wrong with the state law?

Many elder and disabilities law practitioners objected that Pennsylvania had no right to impose restrictions on the use of special needs trusts that were more stringent than federal law. And these more stringent restrictions could make a significant difference to disabled beneficiaries, pooled trusts, and others.

For example, the requirements that the “beneficiary shall have special needs that will not be met without the trust” and that “any expenditure from the trust must have a reasonable relationship to the needs of the beneficiary” could be interpreted as severely restricting what goes into a special needs trust and what could be spent from it.

Suppose a car accident cost 25-year-old Jane the use of her legs. She can no longer work at her former job as a waitress and instead lives on her SSI income. Medicaid pays for her health care. If Jane later recovers $500,000 from a lawsuit against a negligent driver, federal law allows her to set up a special needs trust that will preserve her public benefits while still paying for things that might improve her quality of life: physical therapy, a new wheelchair, a computer, college training to learn new job skills, and so on.

Will Pennsylvania argue that the trust is improper because she already receives medical care and subsistence income and therefore has no “special needs that will not be met without the trust?” Will the state dispute the amount put into the trust? If a trust is set up, will the state argue that the physical therapy and wheelchair have a “reasonable relationship” to her special needs but the computer and college training do not?

You can see how Pennsylvania’s additional requirements create doubt about whether a trust can be established, how much can be used to fund it, and what expenditures might be proper.

Another federal law mandates that although states help to administer and regulate the Medicaid program, a state may not impose requirements that are more restrictive than federal guidelines. Many legal practitioners believe the 2005 Pennsylvania law violated this “no-more-restrictive” mandate.

Class action lawsuit

Plaintiffs holding pooled trust accounts, and organizations who served as trustees, filed suit as a class action to challenge the 2005 Pennsylvania law as it applied to pooled special needs trusts.

On August 22, 2011, a federal judge in Philadelphia ruled that the state of Pennsylvania, having elected to participate in the Medicaid program, was prohibited from adopting Medicaid eligibility rules that are more restrictive than federal guidelines. The court struck down a number of provisions of Pennsylvania’s 2005 law (at least as they applied to pooled special needs trusts) for being more restrictive than federal law.

Special needs requirement. The court found that federal law requires only that a person be disabled in order to establish a pooled special needs trust account. But the challenged state law adds an extra requirement that “the beneficiary shall have special needs that will not be met without the trust.” This requirement, the court said, would “render ineligible disabled persons who would be eligible [for Medicaid benefits] under federal law.” The provision therefore conflicted impermissibly with federal law, according to the court.

Age requirement. Pennsylvania’s law limits the availability of pooled trust accounts to persons younger than 65, the court found, while federal law does not. Therefore, this provision violated federal law, the court said.

“Reasonable relationship” requirement. The court found that federal law allows funds in special needs trusts to “be used broadly for purposes beyond the treatment of specific disabilities.” Pennsylvania’s requirement that distributions “must have a reasonable relationship to the needs of the beneficiary” would narrow the permissible use of funds to “items, products or services … [that] assist in and are related to the treatment of the beneficiary’s disability.” Again, the court ruled, the Pennsylvania statute could not be enforced because it was more restrictive than federal law.

Fifty-percent payback provision. The court interpreted federal law as allowing a pooled trust to retain up to 100% of the remainder in a pooled trust account upon the death of a beneficiary. Pennsylvania’s rule that a pooled trust could retain only 50% was therefore more restrictive than federal law, the court ruled, and once again, unenforceable.

Trust termination. The court also ruled that the state could not enforce against pooled trusts its provision that the state has the power to seek a court order terminating a trust that does not comply with the provisions of its (now largely invalidated) 2005 law.

Some provisions do not conflict with federal law and could be enforced, according to the court. The court found no conflict in Pennsylvania’s requirement that “all distributions from the trust must be for the sole benefit of the beneficiary.”

What happens next

For the moment, Pennsylvania may not enforce the provisions of its 2005 law that the court found violated federal law, at least as to pooled special needs trusts. Pennsylvania has appealed the ruling, however, so final resolution lies ahead.

In the meantime, what does the ruling mean to special needs trusts that are not pooled? To the extent other courts find the ruling persuasive in its reasoning, it could mean Pennsylvania cannot enforce certain provisions of the 2005 law as applied to other types of special needs trusts besides pooled trusts.