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Source of Trust Assets
Based on their source of funding, Special Needs Trusts are categorized either as Third-Party Special Needs Trusts or First-Party Special Needs Trusts.
Third-Party Special Needs Trusts are created and funded by someone other than the beneficiary, like a parent, grandparent or sibling. The trust will be established either during the lifetime of the creator or under the terms of the creator’s will. As explained below, a properly drafted Third-Party Special Needs Trust can provide for the special needs of a person with disabilities without jeopardizing his or her eligibility for government benefits.
First-Party Special Needs Trusts are funded with a beneficiary’s own property, such as an inheritance or the proceeds from a lawsuit. Although the beneficiary’s own assets will fund the trust, the regulations governing First-Party Special Needs Trusts require that the beneficiary’s parents, legal guardian or the court establish the trust. Another requirement is that the beneficiary must not be over age 65 at the time the trust is funded. This type of First-Party trust is commonly referred to as an OBRA, or (d)(4)(A) trust, taking its name from the federal code section authorizing the trust. (OBRA stands for the Omnibus Budget Reconciliation Act of 1993, and the full statutory cite is 42 U.S.C. section 1396p(d)(4)(A).)
In the case of a personal injury claim for the Beneficiary of a (d)(4)(A) Special Needs Trust, before the trust may be funded, Medi-Cal (California’s Medicaid program) must first be reimbursed for those benefits paid prior to the establishment of the Special Needs Trust for medical care necessitated by the wrongful acts that generated the recovery. This “pre-trust lien” may be satisfied only from that portion of the recovery that is specifically allocable to past medical expenses and costs.
Transfers of a Beneficiary’s assets to a (d)(4)(A) Special Needs Trust are not penalized for purposes of means-tested benefits.
Also, if the trust funds are smaller, the beneficiary may wish to instead create a pooled Special Needs Trust (a (d)(4)(C) trust), which does not prohibit the beneficiary from being the grantor and does impose an age limitation. With a pooled trust, the assets of many individuals are “pooled together” for investment purposes; however, the funds are allocated to each individual beneficiary.
A properly drafted trust agreement will address a trust’s obligation to reimburse governmental programs such as Medicaid, SSI or their state equivalent. With Third-Party Special Needs Trusts, the remainder beneficiaries will receive the entire balance of the trust because its assets are not subject to Medicaid payback provisions upon the death of the beneficiary.
First-Party Special Needs Trusts are subject to payback provisions that provide Medicaid with a right to reimbursement from the property remaining in the trust upon the death of the beneficiary. If any balance remains after the Medicaid payback, the excess is then distributed to the designated remainder beneficiaries. If the First-Party Special Needs Trust is a pooled trust, in lieu of the Medicaid payback, remaining funds may instead be allowed to be donated to the pooled trust to be used for other beneficiaries of the trust.
Per 42 USCA 1396P(d)(4)(C), qualifying pooled Special Needs Trusts include: A trust containing the assets of an individual who is disabled (as defined in section 1382c(a)(3) of this title) that meets the following conditions: (i) The trust is established and managed by a nonprofit association. (ii) 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. (iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court. (iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.
Establishing Intent in the Trust Document
To avoid disqualification of a beneficiary for governmental support, applicable federal and state laws strongly suggest that the trust document make clear its intent that the trust assets will supplement, and not supplant or diminish, any governmental benefits to which the beneficiary may be entitled. The trust document should set forth clearly that the Special Needs Trust is not intended to be a basic support trust.
Essential Items in Special Needs Trusts
The following are essential characteristics of a Special Needs Trust: 1) It must be irrevocable; 2) It must be valid under federal and state local law; 3) It must negate a determination that trust assets are “available resources” of the beneficiary for purposes of Supplemental Security Income (SSI), Medicaid or an equivalent state program; 4) Many state programs also impose the requirement that in order to qualify as a (d)(4)(A) or (d)(4)(C) trust, the beneficiary must be disabled within the meaning of the rules governing Social Security Disability.
What Can the Trust Pay For?
Some sample trust distributions for the Beneficiary that should not affect his or her means-tested benefits, could include:
- reasonable compensation of the Trustee, and allied professionals advising the Trustee, e.g. investment manager, attorney, fiduciary accountant
- reasonable compensation of care providers, including family members, where appropriate (Medicaid is often resistant to paid family or friends of Beneficiary due to frequent abuses)
- medical services and equipment not covered by government programs
- domestic and personal care services (housekeeper, grooming, meal preparation)
- household costs other than food, mortgage or rent, real property taxes, heating fuel, gas, electricity, water, sewer and garbage removal
- pre-paid funeral and burial arrangements (however, if the Beneficiary dies before arrangements have been pre-paid, no payments for same may be made from the Special Needs Trust until after Medicaid pay-back is fully satisfied)
- computer or augmentative communications devices, and internet service
- television or other electronic equipment
- apparel, including maintenance and repair of same
- one vehicle used for transporting the Beneficiary (not including a purely recreational vehicle)
- membership in recreational clubs, cultural institutions
- professional services: attorneys, accountants, claims processors, advocates, coaches
- academic or recreational courses or classes
- home decor, furniture, furnishings, appliances
- dry cleaning and laundry services and supplies
- fitness equipment and club membership
- auto maintenance and supplies
- home security alarm and monitoring service
- yard service and maintenance
- insurance for home, auto, liability
- linens, towels, bedding
- personal care items and supplies
- music lessons, cost of instruments
- non-food groceries and sundries
- educational needs and supplies
- over-the-counter medications
- pet, service animal and supplies, veterinary services
- sporting goods and equipment
- stationery, stamps
- telephone service and equipment
- therapies not covered by benefits programs
- tickets to cultural or sporting events
- transportation costs (bus, subway, paid driver)
- cable TV
- vacation for Beneficiary and one attendant
- catch-all: “such uses and purposes as the Trustee deems appropriate under all circumstances” for the sole benefit of the Beneficiary
Choosing a Trustee
The selection of the trustee for a Special Needs Trust is an important aspect of special needs planning. Some of the characteristics of a trustee for a Special Needs Trust should include:
1. Experience to manage the assets pursuant to the prudent investor rules.
2. Where a pooled trust is involved a non-profit organization with trust powers must be the trustee.
3. Knowledge to exercise its discretion under the terms of the trust agreement to make payments on behalf of the beneficiary for supplemental, nonsupport disbursements.
4. The ability to avoid any conflict of interest that might occur if a family friend or family member were to act as trustee.
5. Skills to maintain clear and accurate financial records which, when necessary, can be used to prepare annual court accountings.
6. A trustee who will take a friendly and caring interest in the beneficiary.
Attorney Christopher B. Johnson has been preparing Special Needs Trusts in Los Angeles, Riverside and San Bernardino counties since 1995 and welcomes your questions at (888) 503-7615 or by clicking here. We serve clients at our offices in Pasadena, and Chino Hills.