Fortunately, there are a variety of estate planning options for individuals and families to protect a beneficiary’s eligibility for public benefits. The most-commonly used – Special Needs Trusts – were created or codified into law around the same time as the Americans with Disabilities Act. Special Needs Trusts (SNTs) are an estate planning mechanism whereby the trust holds assets that would be considered resources for purposes of SSI and Medicaid eligibility. By law, because the SNT, not the individual with disabilities, owns the assets, the assets are not counted towards the $2,000 resource limit.
In a Special Needs Trust, a trustee is responsible for the day-to-day administration of the trust assets for the benefit of the individual with disabilities. The trust beneficiary cannot serve as trustee. The trustee must have the absolute discretion to make distributions from the trust for the beneficiary; unlike other types of trusts, the trust terms cannot require periodic (quarterly, annual, etc.) distributions or give the beneficiary the power to compel trust distributions. The trustee may make distributions to supplement, not supplant, the public benefits the beneficiary is receiving. This has been broadly interpreted to include items such as education, therapy, clothing, entertainment, and other items the beneficiary may need. However, a SNT cannot make distributions in cash directly to the beneficiary; further, if the SNT beneficiary is receiving SSI, the trust cannot be used for food or shelter expenses (such as rent or mortgage payments).
There are three types of SNTs: First Party/Self Funded Special Needs Trusts, Third Party Funded Special Needs Trusts, and Pooled Special Needs Trusts. The main difference between these trusts is the source of the assets that fund the trust. Third Party Funded SNTs, permissible in Pennsylvania since 1987 (three years before the ADA was signed into law), allow a third party to create a Special Needs Trust that will hold assets that belonged to anyone except for the beneficiary. As such, they are most commonly utilized in estate planning to hold assets that will pass to the beneficiary upon the death of the assets’ owner(s), or through lifetime gifting. To ensure that the beneficiary with special needs maintains eligibility for public benefits, it is extremely important to not only have a properly-drafted Third Party Funded SNT, but for the estate planning documents and beneficiary designations for nonprobate assets (such as IRAs, 401(k)s, and life insurance) direct the assets to the Third Party Funded SNT, not to the beneficiary directly. For example, the Will or beneficiary designation should direct the assets to “The Third Party Funded Special Needs Trust for my daughter, Jane Doe,” rather than to “My daughter, Jane Doe.”
For beneficiaries with disabilities who inherit assets directly, either through estate planning documents/beneficiary designations (i.e., the “To my daughter, Jane Doe” example above) or through intestacy (the laws that determine how a decedent’s property is distributed when the decedent dies without estate planning documents), First Party/Self Funded SNTs and Pooled Special Needs Trusts are an option. First Party Special Needs Trusts were signed into federal law in 1993, three years after the ADA, and hold assets that “belong” to the individual with disabilities. By law, First Party Special Needs Trusts are permissible for a beneficiary under age 65, and can be created by the trust beneficiary, if competent to do so, or their parent, grandparent, or legal guardian. If the beneficiary is not competent to execute the trust and no permissible third party is available, a court may approve and establish the First Party Special Needs Trust on behalf of the beneficiary. By law, a First Party Special Needs Trust must include a “payback” to the state agency administering Medicaid to the beneficiary, whereby the agency may be repaid for the Medicaid expended on the beneficiary’s behalf during his or her lifetime from the funds remaining in the trust after the beneficiary’s death.
Pooled Special Needs Trusts are administered by a nonprofit agency as trustee for the benefits of multiple beneficiaries. Assets transferred to a Pooled Special Needs Trust are “pooled” for investment purposes with other participants in the “pool” administered by the trustee. They are most-useful when the amount of assets the beneficiary has or will receive will render him or her ineligible for public benefits without a Special Needs Trust, but is too small to justify the additional costs associated with a First Party SNT. Pooled Special Needs Trusts include a payback to the state Medicaid agency, and the funds remaining in trust after the death of the beneficiary remain in the “pool” and are distributed to the other “pool” members.
Because of the additional eligibility qualifications and the increased regulation of First Party Special Needs Trusts and Pooled Special Needs Trusts due to the payback provisions, leaving an inheritance or lifetime gift to a beneficiary through a Third Party Funded SNT is the overwhelmingly preferable option. For individuals and families who wish to leave assets to a loved one with special needs, estate planning that includes a Third Party Funded Special Needs Trust can help insure eligibility for much-needed public benefits.