Defining a Special Needs Trust
A special needs trust (SNT) is a legal arrangement that allows a person with disabilities to save and manage assets without impairing their eligibility for certain means-tested government programs, such as Supplemental Security Income (SSI), Medicaid, or local or state assistance. Its primary purpose is to allow individuals with a disability to maintain a comfortable standard of living while still receiving the necessary medical attention, rehabilitation, or support that they need through public benefits. Generally, in order to be eligible for these programs, an individual has to have less than a certain monetary resource threshold, which usually changes from time to time based on the cost of living in a geographic area . For example, the current SSI resource limit is $2,000 for an individual or $3,000 for a couple. However, the amount and types of property that a disabled person can keep without disqualifying themselves for government assistance can be considerably higher if the property is put into a properly drafted SNT.
Using an SNT can provide a disabled individual a tool to capitalize on the government programs available to them. How SNTs are established (and by whom) and how funds deposited into the trust can be spent without disqualifying the beneficiary from means-tested government programs will be covered in the next sections of this article.
Eligibility for Setting up a Special Needs Trust
To be eligible for a special needs trust (SNT), you must have a disability and receive benefits such that the assets in your SNT would interfere with your continued qualification for Supplemental Security Income (SSI) and other governmental benefits. Those age 65 or older are not eligible for SSI. People who are blind or who have low vision (Scored Standard of 20/200 or lower) are not eligible for SSI.
The person living with the disability is called the beneficiary. Generally speaking, it is not mandatory for anyone to create a trust; however, it is highly suggested. A trust becomes a necessity when special funds or assets exist that you may need, which when used, would disqualify you for SSI and/or Medicaid. It is important to note that if you have funds in a special needs trust, it is vital that the funds are only used for your benefit and not for the benefit of any other family member, friends, caregivers, etc.
There are certain legal requirements for creating a SNT and the DWC’s SNT program manager will ensure that those requirements are met.
Spending Rules for Special Needs Trusts
When it comes to making expenditures from your special needs trust there are some specific rules which must be adhered to. For example, when you take a distribution from the estate, that distribution is considered income to you. Therefore, any distribution of income will affect the SSI and Medicaid eligibility of the beneficiary on a dollar for dollar basis. While that may sound complicated, what it means in effect is that distributions of income should be avoided if possible.
However, that income distribution to the beneficiary does not count for purposes of the asset limitations for SSI eligibility purposes. Therefore, a special needs trust can be a great thing even when distributions are taken. Distributions of principal, on the other hand, are treated as a gift and are not considered income. Therefore, you can make these distributions without endangering SSI or Medicaid eligibility. Another point that must be understood when accessing the funds in special needs trust is that Medicaid takes first priority, meaning that other resources are exhausted before special needs trust assets can be used.
Certain expenses are permitted and can be paid from the special needs trust as long as these expenses are not restricted by law. For example, the following expenses are specifically allowed:
• Medical care and services not otherwise covered under Medicaid or Medicare
• Dental work not covered by Medicaid
• Eyeglasses and contact lenses
• Prostheses
• Hearing aids
• Educational expenses
• Transportation costs not covered by Medicaid
• Food, clothing and shelter
The above list is only a partial list of permissible expenditures, however, generally speaking anything that Medicaid does not otherwise provide are permissible as long as the trust documents do not expressly prohibit the expenditure. The flexibility of the trust allows the trustee the ability to make changes to the trust and how the funds are spent, as long as it complies with the laws and the terms of the trust.
What expenditures are prohibited? Generally, any expenditures made for the personal benefit of someone other than the person suffering the disability are specifically prohibited. If distributions from the trust would provide a direct benefit to the beneficiary, then even though a family member may be receiving the money, nevertheless, that distribution is still permissible. However, when a third party recipient receives a distribution and that distribution either indirectly benefits the beneficiary or is contrary to the best interests of the beneficiary, then the distribution is not permissible.
Impact of Spending on Government Benefits
Unless the funds are paid directly from the trust to an approved payee, trust spending will impact the availability of SSI (Supplemental Security Income) and Medicaid. Under SSI, a person is entitled to retain $2,000.00 per month. For married couples it is $3,000.00. Under the Medicaid program, there is a distinct difference in the SSI and non-SSI rules. Under the SSI program, excessive income, for the most part, simply gets deducted. If a child receives monthly distribution from the trust, the amount of that distribution will be deducted from SSI benefits on a dollar-for-dollar basis. It is important that the trustees work with the beneficiary and scheduled distributions are coordinated with payment of his or her SSI check. Depending on whether the SSI check is deposited into the beneficiary’s "pay-to" account or the trustee’s account, the exact day on which the distribution is made will be critical. In many cases, however, the SSC (Special Needs Coordinator) and I have found that, in practice, the Social Security Administration simply does not take the money away for persons who require SSI. In these cases, the SSA simply allows the SSI money left over each month to accumulate and with certain exceptions. It is also important that the parents and grandparents understand that sources of income that are always excluded from SSI consideration: Under SSI rules, you need to understand that SSI, unlike Medicaid, is always "means" based or "income" based. SSI has always followed the cash method of accounting and so does HTC. This means that SSI considers any money spent by the "principal" but received by the account holder and the money that goes in and out of the account. B. NON-SSI Under the Medicaid program, there are two different rules for SSI related programs as opposed to non-SSI Medicaid programs. A. SSI related Medicaid (MEDSLTSS) disability criteria apply; B. Non-SSI related Medicaid (MTBP) disability criteria do not apply. SSI Related Medicaid (MEDSLTSS) For the MEDSLTSS program, if the individual receives a monthly check from a special needs trust, it will need to be verified that the center is spending money as intended. Most trustees will be able to provide a memo or certification to confirm this. In addition, if the trustee is managing the funds in a separate account for SSI recipients, a copy of such depositor arrangement should be provided to the center.
Trustee Duties and Monitoring
A fundamental function of a trustee is to preserve the assets so that future needs are met. The trust instrument should provide for the trustee to pay only those expenses that are consistent with the SNT spending rules. The trustee can have the beneficiary make expenditures or surveys asking the beneficiary a few simple questions to verify compliance with the rules. An example of this is a monthly survey that the Trustee submits to the beneficiary regarding monthly expenses . Once the validity of such expenditures has been confirmed, the trustee can then reimburse the specific care provider for the expense, i.e., pay the orthopedic surgeon directly for recent surgery. Alternatively, the trustee can pay the beneficiary in a lump sum sufficient for the beneficiary to pay the vendor directly. Such reimbursements are necessary if a demand for payment from the beneficiary has not been received prior to the end of the month. In general, it is advisable that the trust pay vendors directly, rather than making payments to the beneficiary.
Common Special Needs Trust Spending Errors
Common mistakes when spending from a special needs trust can have repercussions on government benefits. Spending money for qualifying expenses, such as dental or other medical expenses, is allowed, but you have to be careful that the expenses actually qualify under both the trust terms and government guidelines. Failure to spend correctly may result in loss of government benefits, repayment of benefits already paid or even eviction from a care facility!
We reviewed types of expenses that are considered to be qualifying as well as what expenses should be avoided last week. It is important that the trustee for a special needs trust work with the beneficiaries to understand the types of expenses that can and cannot be paid for with special needs trust funds. Understanding what can or cannot be done is not enough! Spending rules must be followed correctly to ensure no loss of government benefits.
Spending for non-qualifying expenses is one of the top mistakes that we see. Unfortunately, often the initial mistake is made, and by the time we are called to help out, the problem has already occurred. Sometimes a purchase must be reversed or a trust distribution must be repaid back to the trust. Swift action to correct the error is the key to minimizing government benefit issues. In some cases, an exemption can be granted to allow the purchase. Sometimes it is a matter of amending the special needs trust to add a supplemental needs trust for the child that allows for full distributions until the age of 25 with slight modifications.
Trust distributions should also not be made directly to the child so it is in their control. The distribution should be made to a bank account owned by the trustee that is restricted so that the beneficiary does not have access to the funds. These funds are then paid out as qualifying expenses directly from the bank account.
Future Issue regarding Special Needs Trusts
The issue of special needs trust spending is not likely to be resolved with the current state of the law. Future legislation and new interpretations by the Social Security Administration, as well as changing administration policies, will continue to shape special needs trust spending rules.
As noted previously, some case law and administrative guidance has expanded the opportunities for the use of special needs trust funds . With congressional legislation currently being considered which would significantly expand the use of ABLE accounts (accounts funded by the disabled individual with income that is not otherwise subject to the trust spending rules), the growing acceptance of pooled trusts (which afford many of the benefits of special needs trusts), and the implementation of proposals to extend the income cap on impaired trusts, special needs trust use may not in fact be on the rise as was once feared to be the case. If these measures are adopted, however, families should plan accordingly. They should consider funding ABLE accounts for accumulated income and for providing payments from impaired trusts to possible beneficiaries. Spending, therefore, may not be as significant an issue as it once was.