Wondering if a special needs trust may be your best option?
Recall that a trust is a living entity that owns assets and provides how those assets are to be utilized while the beneficiary is alive and then what happens to remaining assets upon the beneficiary’s death (see Trust Document Basics here to read more). There are different types of specialized trusts used for specific purposes.
What Is a Special Needs Trust?
A special needs trust is a specialized trust that is specifically designed to hold assets in a way that allows the beneficiary to preserve or obtain need-based public benefits from government assistance programs such as SSI or Medicaid.
Special needs trust assets are managed by a private or professional trustee and used as supplemental security income to maintain and increase the beneficiary’s quality of life by purchasing products or services that are not covered by the public benefit. To complicate things further, there are different types of special needs trusts.
But assets placed into a properly drafted and executed special-needs trust are 100% non-countable for Medicaid and SSI eligibility. Furthermore, an unlimited amount of assets may be placed in a special-needs trust.
Some elder-law clients come in already having a special needs trust, and the estate planning attorney must review them to make sure that their terms do not conflict (as they sometimes do) with what is required for Medicaid planning purposes.
When a Special Needs Trust is Needed
First, special needs trusts are only for those who are deemed "disabled."
Below are a few common examples of when it may make sense to utilize a special needs trust.
A Medicaid Recipient Comes Into an Unexpected Influx of Money
For example: if a Medicaid recipient is in a car accident and receives a personal injury settlement, the influx of additional money might jeopardize their Medicaid eligibility—and cause the termination of Medicaid benefits.
The personal injury client, already on Medicaid, should be advised to create a first-party (or self-funded) special needs trust to hold the personal injury settlement to protect their Medicaid eligibility. First-party special needs trusts are discussed in more detail below.
A sudden source of money might also come from a divorce (i.e. alimony payments or retitling of assets from the ex-spouse to the Medicaid recipient) or even an inheritance.
A Parent With a Disabled Child Doesn’t Want to Disinherit Their Child But Doesn’t Want to Jeopardize the Child’s Medicaid Benefits Either
The parent’s special needs estate planning attorney would suggest the creation of a third-party special needs trust for the benefit of their disabled child. This would be a trust created out of the parent’s Will or Revocable Trust.
Upon the parent's death, a third-party special needs trust would be created, managed by a trustee who would provide only for items and services not covered by Medicaid. This is also referred to as a testamentary special needs trust.
Third-party special needs trusts are discussed in more detail below.
OR, similarly, a situation where a sick spouse requires nursing home care. The well spouse doesn’t want to disinherit the sick spouse but doesn’t want to jeopardize the nursing home spouse’s Medicaid approval if the well spouse dies first.
A Third-Party Special Needs Trust or Qualifying Special Needs Trust may be appropriate. This is discussed in more detail below.
Between Social Security and Pension, a Medicaid Applicant Earns Too Much Income to Qualify for Medicaid
A qualified income trust (also known as a Miller Trust, another type of first-party special needs trust) can help. Miller Trusts are discussed in more detail below.
First Party Special Needs Trust (d4A Trusts | Self-Settled Special Needs Trust | Self Funded Special Needs Trust)
d4A refers to the part of the United States Code (42 USC 1396(p)(d)(4)(A)) where these trusts gain their statutory authority. They are called 1st-party special needs trusts because they are made to be funded with assets already owned by the trust beneficiary (or with assets the beneficiary is already legally entitled to), with a disability, and under 65. It contains much of the same restrictive language as a 3rd party special needs trust. The main difference is that this trust is funded by the assets of a person who actually has a disability.
- “Disabled” is defined in 42 USC 1382c(a)(3)(A) as unable to engage in the substantial gainful activity by reason of medically determinable physical or mental impairment.
This is the type of trust commonly used when a Medicaid recipient comes into an unexpected lump sum of money (e.g., the personal injury settlement or inheritance).
Regardless of where the money comes from, once that money is in the Medicaid recipient’s name, their Social Security and Medicaid are at risk:
- PRIOR TO 12-13-2016: Only specified Grantors/Settlors: parent, grandparent, court, and guardian may establish the d4A trust....not the disabled person.
- AFTER 12-13-2016: With the passage of the 21st Century Cures Act, disabled individuals under age 65 may now create their own d4A SNT.
- If a minor or incapacitated adult needs approval of probate court, if beneficiary’s assets are used to fund the special needs trust (often the case with personal injury settlements).
- No court approval needed for third-party special needs trusts.
Medicaid Payback provision — If anything left in a first party special needs trust when the beneficiary dies, must pay back to Medicaid. Silver lining: when you pay back Medicaid, you get a really good deal because Medicaid rates are extremely low (compared to what you would pay out for cash-based / private pay services).
Characteristics of First Party d4A Special Needs Trust
- If someone is over 65, they cannot use a d4A trust!
- The SNT must be irrevocable.
- Normally trustee of 1st party SNT is a professional (bank), which includes significant administrative costs.
- Assets from a first party SNT may only be used for the beneficiary (the disabled person).
- The SNT must contain a Medicaid-payback provision….if the Medicaid applicant is expecting to receive a lump sum, think about alternatives to putting money into the SNT, such as buying or improving homestead property - which is exempt from being counted against you for Medicaid purposes.
- The idea is to use those funds to supplement what is already being provided by Medicaid or other public benefits. Cannot use funds to duplicate Medicaid benefits (food and shelter)
Items Not Covered by Medicaid
- Certain medical services, therapies, equipment
- Housekeeping, cooking, home decor
- Computer / communications devices / television / appliances
- Grooming / salon services / clothing / dry cleaning
- Entertainment, recreation, transportation costs
- Educational needs and supplies
- Music lessons, purchasing instruments
- Linens, towels, bedding,
- Yard services, home security services
- Accountants, attorneys, coaches
- Prepaid funeral/burial arrangements (must be done prior to beneficiary’s death… otherwise no money may be spent from SNT until Medicaid has been paid back).
Miller Trust | Qualified Income Trust | d4B Trust
d4B refers to the part of the United States Code (42 USC 1396(p)(d)(4)(B))
Florida is an “income cap state,” which means that Medicaid will not provide benefits if the Medicaid applicant is even a dollar over the state’s income cap ($2,199.00 in gross-monthly income as of January 1, 2016).
(d)(4)(B) is known as Income-Only Trust/Qualified Income Trust or Miller Trust. This is another type of irrevocable special needs trust that is solely designed to own income to get around income caps imposed by Medicaid. It is typically established by the person who needs to enter a nursing home and qualify for Medicaid (as grantor of the trust). If the Medicaid applicant is incapacitated, a properly executed power of attorney can be used to have the Medicaid applicant’s agent sign to establish the trust on behalf of the disabled person.
But if there is no power of attorney (or the wrong kind of power of attorney) and disabled person does not have capacity to sign, then you need to see if you can get the judge to sign (or set up a guardianship).
Pooled Special Needs Trust | d4C Trust
d4C refers to the part of the United States Code (42 USC 1396(p)(d)(4)(C)). These can be first party or third party special needs trusts.
(d)(4)(C) is a pooled trust. You put your money into an existing master trust that is managed by a not-for-profit trustee. Someone looking to qualify for Medicaid can participate / join this existing pooled trust by signing a joinder agreement). The trust is referred to as a “pooled trust” because the assets of all the subtrusts, while accounted for individually, are pooled for investment purposes.
The master trust may have 100 different subtrusts under one umbrella. The beneficiary can choose whether their subtrust is invested conservatively (if they need the money immediately) or more aggressively (if the money will not be needed for many years).
Benefits of a Pooled d4C Special Needs Trust:
- Pooled trusts are cheaper, administratively, to run, which results in more money for the beneficiary. Useful for when assets would disqualify for Medicaid but not enough to justify the expense of an individual d4A trust.
- First-party accounts can be set up by the beneficiary or by their parent, grandparent, guardian or by court order. Third party accounts can be set up as well, but pooled trusts have a payback obligation.
- Upon death of a beneficiary, a pooled trust can either pay back Medicaid or pooled trust can retain the money and use it for other disabled people in other subtrusts (who have maybe run out of money but are in need of services). This election is negotiated up front.
- Can use d4C trust even if the beneficiary is over age 65 (in Florida).
- Can use a Pooled Trust as a Substitute for a Qualified Income Trust.
If the Medicaid applicant only has an income problem, stick with QIT. But, if a Medicaid applicant has an income and cash on hand (asset) problem. If a person has $25,000 in the bank, they can spend it down to qualify, but that might be wasteful.
It might be better to put that money in a pooled trust so the trustee can supplement their care and spend it on the Medicaid applicant for other things that they need that the nursing home does not provide. This person would also have a pooled trust hold the existing cash asset and take in the income every month.
So, the d4C can double as an asset and income trust.
(For Child) Third Party Special Needs Trust
Third-party special needs trusts refer to those that are funded with assets of a person other than the beneficiary. In other words, the money comes from someone other than the disabled person. Third party special needs trusts may be established inter-vivos (during the settlor’s life) or as a testamentary trust (created as part of the settlor’s will or revocable trust).
Usually it is a parent, grandparent or other family member who wants to leave part of their estate to their disabled child or grandchild without compromising the disabled person’s ability to access public benefits (or get cut off from public benefits). A d4A trust (for those under 65) is subject to a Medicaid payback. Can avoid Medicaid payback by doing some preplanning.
If a third-party special needs trust is created by a will or revocable trust as part of an estate plan that indicates a special needs trust is to be created (out of the will or revocable trust) for the purposes of “supplementing public benefits and not to supplant them.” Upon the death of the beneficiary, the Will would provide that the remaining assets in the special needs trust go to other beneficiaries and not Medicaid or social security.
(For Spouse) Third Party Special Needs Trust | Qualifying Special Needs Trust
The concept for a QSNT came out of the elective share statute: one cannot disinherit their spouse, even using revocable trusts. For example: you have a spouse in a nursing home, and you try to disinherit the spouse because they are receiving Medicaid benefits (and you do not want them losing Medicaid benefits).
But the problem now is that the spouse has an elective share. If they decline their elective share, Medicaid sees it as a transfer of assets subject to Medicaid penalty (similar to gifting assets). Utilizing a qualifying third-party special needs trusts, the healthy spouse can transfer everything to spouse (or at least 30%, per elective share rules), which is funded as part of the probate process per the Will.
During the probate process, the elder law attorney will contact DCF (send Will and bank statement to explain how special needs trust was funded) and the beneficiary will then continue to qualify for Medicaid. Trustee, often a child, can now use the money to buy things for the beneficiary that Medicaid does not cover. Similar concept to above: “supplement public benefits, not supplanting public benefits.” On the Medicaid-recipient’s death, there is no Medicaid payback.
Under Federal law, cannot create a special needs trust for a spouse, other than, by Will. The law states that one cannot utilize a revocable trust to create a SNT for a spouse (like you can for a child).
How to plan around an estate plan that utilizes a revocable trust for a spouse who needs Medicaid?
If all assets of a well spouse are in a revocable trust, you draft it with a reverse pour-back: “If grantor dies before the spouse in the nursing home, 30% of the assets of the trust are poured back into the estate.” Then the Last Will and Testament of the well spouse creates the qualifying special needs trust.
The major benefit to a third-party special needs trust is that they may be established for a beneficiary over the age of 65 and they are not subject to the Medicaid pay-back requirement.
So, if you want to make sure that third-party assets are not placed into a first-party special needs trust, because that would needlessly subject those assets to Medicaid payback.
The Responsibility of a Special Needs Trust Trustee
After a special needs trust is properly drafted, signed and funded, the trustee plays a very important role. The trust will instruct the trustee that they are only to use the special-needs trust funds on the beneficiary (the person who has a disability).
If the trustee spends money on anyone else (including the trustee him or herself), and thus violating the terms of the special needs trust, Medicaid qualification could be at risk.
If the trustee spends money from the special needs trust improperly—e.g. duplicating services already provided by Medicaid instead of only paying for items or services not provided for by Medicaid—the Medicaid benefits could be reduced, or even eliminated.
The trustee needs to understand the tax consequences of their actions and what standards they owe the beneficiary as their fiduciary (e.g. income, deductions, etc. of d4A trust are reported on beneficiary’s individual tax return, even if no income is actually distributed).
It is recommended to utilize a professional trustee for special needs trust due to their many restrictions, pitfalls, and administrative intense nature as a fiduciary. The trustee also needs to be familiar with other public benefits that might be available, such as Medicare and SSDI. This will prevent the trustee from wasting money on things that should be paid for by government entitlement programs or benefits.
As indicated earlier in this article, we may need to revisit old special needs trusts because they will often have language restricting trustee’s use of funds for healthcare (because generally, you cannot use SNT funds to duplicate needs-based government services).
But now you may want to make sure that the trustee of a special needs trust has the authority to pay for private health insurance or even for supplemental health care therapies that are not provided for by Medicaid.
Be careful not to set up a first party SNT to put someone on Medicaid when they could more easily obtain private health insurance through the Affordable Care Act that does not have the payback requirement. *Don’t want Medicaid health insurance when you can afford private health insurance. Can tailor SNT accordingly to qualify for both.
If the parents of a disabled child are divorcing, they should agree to ask the judge to enter a court order directing that child support be paid to a first party self-settled special-needs trust, so that means tested government benefits continue at full rates instead of being offset by the child support amount.
If you have additional questions about special needs trusts, contact a Florida estate planning lawyer today!