Special Needs Trusts

Special needs trust planning is a highly technical area. Not all estate planning attorneys are capable of setting up and implementing special needs trust plans. We welcome you to contact us at Frankel Sims Law to discuss how a special needs trust can help you and your family members.

What is a Special Needs Trust?

A special needs trust, otherwise known as a supplemental needs trust, is a legal instrument that is established for the benefit of a person who is receiving, or will be receiving, means-tested government benefits, such as SSI (Supplemental Security Income) and/or Medicaid (health care coverage for people with relatively little income and assets).

How are Special needs trusts helpful?

Let’s say that grandma has a grandchild who was born with a disabling condition. Grandchild regularly needs expensive medical care. If grandma’s will leaves money directly to her grandchild, grandchild will have to use those inherited funds before being eligible for further government benefits. A good solution to this problem is for grandma to have grandchild’s inheritance paid into a third-party special needs trust. The trustee of the trust will be able to use trust monies to purchase services and goods for grandchild that are not provided through governmental assistance. As long as the trustee spends trust monies in an authorized fashion, grandchild will continue to receive uninterrupted government benefits. Grandma can provide that if grandchild does not survive the complete distribution of the third-party special needs trust, the remaining assets in the trust can be paid directly to other beneficiaries chosen by grandma.

Example #2:
Let’s say that daughter receives government benefits, such as SSI and Medicaid. Mom dies with a will that leaves monies directly to daughter (i.e., not in a third-party special needs trust). Daughter essentially has two choices. First, she can accept the inheritance and use it for any purpose, but if she does, her access to SSI and Medicaid will be restricted for a period of time. In other words, daughter will be penalized for having received the inheritance and used it for any purpose she desired. Second, daughter may immediately deposit the inherited monies into a self-settled special needs trust, otherwise known as a supplemental needs (d)(4)(A) pay-back trust. The self-settled pay-back trust must provide that any monies left in the trust at the time of daughter’s death shall be paid to the government to the extent of the value of the government benefits provided to daughter during her lifetime. While daughter is living, the trustee may use trust monies to provide daughter with services and assets that are not provided for through government benefits. It is very important that only authorized expenditures are made from the special needs trust; therefore, it is critical that you appoint a trustee who knows, or is capable of learning, the technical rules related to government benefits and special needs trusts.

The following are some important rules that must be adhered to during the administration of special needs trusts:
It is very important that the rules regarding distributions from special needs trusts are followed. Otherwise, you risk that SSI and/or Medicaid benefits will be withheld for a period of time. To ensure that benefits continue uninterrupted, it is very important that you follow the rules regarding distributions from the trust.

First Rule
No trust monies should be distributed from the trustee directly to the beneficiary. When the trustee spends trust monies for the beneficiary’s supplemental needs, the trustee must direct payment for products and services directly to the provider of the products and services. For example, if trust monies are used to purchase a television for the beneficiary, the trustee must not give money to the beneficiary to make the purchase. Rather, the trustee must pay trust monies directly to the store.

Second Rule
Trust assets must only be used for “supplemental” needs, those products and services not provided through SSI and Medicaid. Those government benefits programs are designed to provide for primary needs. Trust property must only be used to satisfy supplemental needs. The following is a list of many of the products and services that typically may be purchased by special needs trust monies:

  • Television
  • Household furniture
  • Transportation expenses
  • Vehicle
  • Vehicle insurance
  • Exercise equipment
  • Trips and vacations
  • Eye glasses & contacts
  • Education expenses
  • Special dietary needs
  • Out-of-pocket medical & dental expenses
  • Life insurance premiums
  • Materials for hobbies
  • Tickets for events/movies
  • Musical instruments
  • Cosmetics
  • Club memberships
  • Home improvements
  • Computer equipment
  • Conferences/seminars
  • Vocational rehabilitation
  • Annual independent physical check-ups
  • Cable
  • Telephones and radios
  • Cameras
  • Visits to friends/family
  • Entertainment
  • Newspapers/magazines
  • Personal care attendant
  • Professional services
  • Athletic training equipment
  • Physical rehabilitation
  • Electronic equipment