Nora’s mother, Amy, is an eighty-seven year old artist who lives in downtown Raleigh. Amy is loving retirement. She spends hours at her local art studio honing her pottery skills. After fifty years of hard work, Amy needs nursing care because it is very hard for her to navigate her apartment. The cabinets are too heavy for her and she has difficulty getting in and out of the bathtub. With rent being so high and low-income elder facilities being packed to capacity, Amy is concerned about making ends meet. Nora is grateful that her mother always provided for her family, and she wants to make Amy’s golden years as comfortable as possible. She is concerned, however, that providing help for her mother will disqualify Amy from needed social services; Nora truly cannot afford another dependent. After calling a lawyer, Nora decides that the best thing for her situation is to create a special needs trust for Amy.
Some public benefits are “means-tested,” meaning that if an individual has a certain income, she can no longer qualify for help. Unfortunately, those with just enough income to be disqualified from receiving help sometimes struggle to make ends meet when they need to pay for both care and rent. In the scenario above, a special needs trust (“SNT”) will allow Nora to help her mother without disqualifying her for needed social services. An attorney would be able to help Nora create an SNT that will provide Amy with the most benefits possible without disqualifying Amy for the services that she needs to survive. This means that they will help Nora create a “third-party” special needs trust instead of a “self-settled” trust, and then ensure that no payout disqualifies Amy from any public programs that she would need.
A trust is a legal relationship between a grantor and a trustee. The grantor makes a trust document with certain rules about how properties are to be held and distributed. The grantor then chooses a person to be the trustee. The trustee is responsible for following the trust document instructions and distributing the grantors properties according to the rules. The people to whom the properties and assets are distributed are called beneficiaries. Beneficiaries get the benefit of the distributions.
Here is how it would look in practice:
Nora decides to create a trust for Amy. She goes to see an attorney and tells her how she wants funds to go toward her mother. The attorney writes down her wishes and then puts together an official document called a trust instrument. Nora must pick a trustee to carry out the tasks listed in the trust instrument. She chooses her wife, Marie. Marie then has a fiduciary responsibility to follow the rules of the trust instrument and pay out as is necessary to help Amy.
Self-Settled v. Third-Party
It is important to distinguish between what type of trust one wants to establish for tax purposes, benefit determinations and eligibility and court involvement.
A Self-Settled Special Needs Trust is established by the beneficiary, with the beneficiary’s funds for the purpose of retaining or obtaining eligibility for public benefits. Self-settled trusts are not always the preferred type of SNT. A Self-Settled Special Needs Trust must include a provision directing the trustee to pay back anything the state Medicaid program had paid for the beneficiary after the beneficiary’s death. Additionally, in many states, the rules governing permissible distributions for Self-Settled Special Needs Trust are significantly more restrictive than those controlling Third-Party Special Needs Trust.
Self-Settled Special Needs Trust trusts can be created accidentally, even if the person creating the trust does not want to make a self-settled trust. If the beneficiary had the right to possess the assets funding the trust before the trust was created, then it is self-settled.
A Third-Party Special Needs Trust is one established by someone other than the person with disabilities, with assets that did not belong to the beneficiary. Because the beneficiary never had a right to take possession of the assets, the trustee can distribute the funds as needed for the beneficiary’s benefits. These trusts do not require families to pay the excess funds back to the government after the beneficiary passes away.
In the scenario above, if the trust is constructed appropriately, Marie will pay Amy whatever Nora allows her to pay. Marie follows Nora’s rules in deciding what to pay out and when. Because Nora has no right to access the funds outright, she is not sufficiently in control of the funds to be required to pay back the trust assets after her death.
Not all services disqualify recipients from aid based on income. For example, Social Security Disability Insurance and Medicare do not remove coverage based on income, so they are not means-tested. Therefore, restrictive trust language may limit payouts under those systems. In contrast, Veterans’ benefits provide benefits based upon unemployability or a percentage of disability. Subsidized housing is a benefit provided for low-income individuals. Supplemental Security Income (SSI), Medicaid, Subsidized Housing, Temporary Assistance for Needy Families (TANF) are “means-tested” programs. Because these programs are “means-tested” a Special Needs Trust will have a big impact on the financial eligibility requirements for these programs. Careful creation of a Special Needs Trust will be needed so that government benefits are not lost.
Attorneys creating special needs trusts must be well versed in the various social services for which the beneficiary may qualify to ensure that the system for paying out does not result in disqualification.
If you would like more information on Special Needs Trusts and whether they are a right fit for your situation, reach out to us and we’d be happy to help.
Special thanks to Jordan Arroyo, Daisha Barnes, Kathleen Miller, Lexus Sanders for their collaboration on this article.