Special Needs Trusts - In General

A special needs trust is a trust contemplated by the federal code 42 USC 1396p(d)(4) to exclude certain income and assets from being counted in certain needs-based government benefit eligibility calculations.

All special needs trusts serve the primary purpose of allowing one with special needs (whether they are disabled, blind or elderly, as defined in: Section 1614(a)(3) of 42 U.S.C. 1382c https://www.ssa.gov/OP_Home/ssact/title16b/1614.htm#act-b1614-a-3 to qualify for needs-based public benefits (mainly: supplemental security income (a/k/a SSI) and Medicaid). 

If money were placed in the special needs beneficiary’s personal checking account, that money is “counted” against them in terms of qualifying for needs-based public benefits. Instead, by placing the same funds inside a first party or third party special needs trust, they become non-countable for needs-based government program eligibility purposes - so long as the goods and services purchased by the special needs trust are not already provided by the government benefit in question.

Difference Between First Party Special Needs Trust and Third Party Special Needs Trust

The primary difference between a first-party special needs trust (as defined in: 42 USC 1396(p)(d)(4)(A) and a third-party special needs trust is that a first party special needs trust holds assets that originally belonged to the one with special needs; while a third-party special needs trust holds assets that never belonged to the special needs beneficiary, rather they originally belonged (as the name of the trust would indicate) to some third party for the benefit of the person with special needs.

As the subject of this article, we’ll delve deeper into the third party special needs trust, which I will, sometimes refer to as a “3PSNT.”  I may also refer to the special needs beneficiary as “SNB.”

Typically, 3PSNTs are made part of a person’s estate plan so that they can leave money to a special needs beneficiary without ruining the SNB’s access to government benefits. 3PSNTs can hold cash, investments, real estate, and receive the proceeds of life-insurance policies.

Advantage of Third Party Special Needs Trust vs. First Party Special Needs Trust

The main advantage that a third party special needs trust has over a first-party special needs trust is that, because the assets in a 3PSNT never belonged to the special needs beneficiary in the first place, Medicaid is not entitled to be paid back from third party special needs trust assets that remain after the SNB passes away. 

When You Cannot Use a Third Party Special Needs Trust

The third party special needs trust is not useful, for example, if the special needs beneficiary individually comes into a sudden influx of money. Typically, I see this occur by way of a personal injury settlement or an unplanned inheritance (e.g. when a will names the SNB individually rather than a 3PSNT for their benefit). 

The inheritance problem, in theory, can be planned around. However, the personal injury settlement and, less commonly, the SNB winning the lottery or slot-machine jackpot. In these scenarios, the special needs beneficiary cannot place these assets into a 3PSNT, nor can they refuse, disclaim or give-away the assets, as this could result in a period of ineligibility. As a result, a first party special needs trust, or other planning mechanism, will be needed. 

Age Limits to Special Needs Trusts

A secondary advantage is that a third party special needs trust has no age limit, where as a first-party special needs trust can only be set up for a special needs beneficiary that is under the age of 65. 

A third advantage is that the donor (i.e. the third party that will eventually fund a third party special needs trust when they pass away) usually benefits from paying income taxes at their personal tax rate while they are alive because the funds typically remain in the donor’s name (or in the name of their revocable trust) as opposed to immediately having to pay the highest tax rate imposed upon trusts. However, after the trust is funded, the 3PSNT will have to file its own tax return and then pay the higher tax rate. 

But, very generally speaking, a 3PSNT is an irrevocable trust that usually requires its own tax ID. This is because, typically, a third party special needs trust is not created right away, but is usually born out of a Will or Revocable Trust after someone who does not require government needs-based benefits, passes away. It is also, very quickly, taxed at the highest income-tax rate. 

However, if a 3PSNT is created during the lifetime of the grantor (usually the parent or grandparent of the SNB) can be drafted as a grantor trust and taxed at the grantor's individual income-tax rate. 

The author of this article is not a CPA or tax attorney and the tax consequences of special needs trusts are beyond the scope of this article.

Typical Third Party Special Needs Trust Scenarios

Typical estate planning between spouses leaves all joint property to the surviving spouse. When the last spouse passes away, all assets are distributed to the children in equal shares.

But, this estate plan would be wholly inadequate if one of the spouses or children were disabled and in need of home care, ALF care, nursing home care or access to any needs based government benefits. Furthermore, an estate plan that fails to consider the possibility of either spouse, or even children, becoming disabled, can be short sighted. People get into car accidents, have strokes, heart attacks, or inevitably just become frailer with age.

Lets focus on the two spouses scenario. 

If one is sick/disabled requiring access to government benefits, while the other spouse can live independently, an experienced Florida elder law attorney can assist with preserving assets for the well spouse able to live in the community and obtain long-term care benefits for the other spouse in need. This is not where a third party special needs trust comes into play, yet. 

But, it is not uncommon for the well / caregiver spouse to predecease the disabled spouse in need of long-term care Medicaid benefits. But without proper planning, when the first spouse dies, the surviving spouse has a right to their elective share. 

Special Needs Trusts and the Elective Share in Florida

Fla Stat 732.201, 732.2035, and 732.2045.

The elective share law prevents one spouse from disinheriting the other unless a valid agreement between them is in place. See City National Bank of Florida v. Tescher, 578 So. 2d 701 (Fla. 1991).

What to do? The sick spouse’s inheritance will likely result in ineligibility. Assuming no prenuptual or postnuptual agreement, disclaiming one’s right to their elective share is considered tantamount to giving assets away. In a Medicaid long-term care context, giving away assets will result in loss of benefits as well for a period of time (depending on the value of assets given away by the SNB).  

This problem is rectified by a type of third party special needs trust known as a qualifying special needs trust, as contemplated in Fla. Stat. 732.2025(8).

Qualifying Special Needs Trust - an Important Type of Third Party Special Needs Trust

A qualifying special needs trust is established for the sole benefit of the surviving spouse with court approval (which means - as antithetical the concept is to most estate-planning attorneys - opening a probate will be necessary). After the surviving spouse passes away, as mentioned above with regard to 3PSNTs, other heirs will be able to benefit from the remaining corpus of the trust without losing anything to medicaid estate recovery. 

See 1640.0576.01, 07, and 08

F.S. 732.2045 also provides that assets in a qualified special needs trust are not part of the elective share so Medicaid cannot argue that the funds were subject to the surviving spouse’s right to elect their claim.

Testamentary transfers to a third-party special needs trust are not subject to SSI or Medicaid transfer rules.42 U.S.C. §1396p(d)(6); HCFA Transmittal 64 §3259.1A1.

As an aside, when getting court-approval of a qualifying testamentary special needs trust, its is prudent to serve formal notice on the Agency for Health Care Administration (AHCA) and  the Department of Children and Families (DCF) so that they should be later unable to credibly claim any issues with the 3PSNT. 

Third party special needs trust assets can be managed and invested with any financial adviser. They are also secure from attack by the SNB's creditors. At special needs beneficiary's death, the trust can dictate where the funds go (i.e. the remainder can go to other family members, not Florida Medicaid).

Interestingly, while special needs trusts are great for SSI and Medicaid eligibility, the VA will count trust funds against the SNB for eligibility purposes (e.g. VA's improved pension with aid and attendance). 

According to POMS (SI 01120.200D.1(a)), trust assets are available if the individual has legal authority to direct distributions for his/her support and maintenance or has the right to revoke the trust. As a result, a spendthrift clause is mandatory to keep the trust assets from being deemed available (SI POMS SI 01120.200.B.16 and  POMS SI 01120.200.D.1.a). 

3rd Party Special Needs Trust as the "Pay On Death" Beneficiary

While we discussed the two-spouses scenario, other examples of when a third party special needs trust becomes useful is when the 3rd party special needs trust is named "pay-on-death" beneficiary of bank accounts, life insurance policies for the benefit of a disabled child or grandchild. In a non-spousal scenario, probate is not necessary. The 3PSNT can exist independently, or be borne from a revocable trust. 

If Johnny Smith has special needs and receives (or is anticipated to benefit from needs-based government programs such as SSI or Medicaid) Johnny Smith's parents would not want to name John Smith as a beneficiary under their Will or Revocable Trust (or pass away intestate, which would require certain assets to pass to Johnny). Instead, they would want to name the 3PSNT, which might be called the, "Johnny Smith Irrevocable Special Needs Trust." 

The trustee of the 3PSNT would make sure to follow the terms of the trust, which should be carefully drafted to ensure that disbursements do not cause a loss in benefits. An example is making a gift to someone other than the special needs beneficiary. However, nearly all other expenses, with very few exceptions - if for the sole benefit of the SNB - are allowable. 

DO NOT ADD THE SNB's ASSETS TO A 3PSNT. also, don't add third party assets to a first-party special needs trust (as it will subject the third party assets, unnecessarily to medicaid estate recovery). 

Important Terms of a third party special needs trust

+ SNT should state that it is designed to supplement, not supplant, any means-tested benefits for which the Beneficiary is otherwise eligible

+ SNT should state that Trustee is not obligated to provide for Beneficiary's basic support and maintenance, and that the Beneficiary cannot access the SNT for such purposes

+ SNT should provide that, in general, no distribution should be made to, or for the benefit of the Beneficiary if: 

• a governmental or other program or resource can fully satisfy the need

• the manner of disbursement would adversely affect the eligibility of the Beneficiary for such programs

+ SNT document should provide flexibility for Trustee to "opt out" of government benefits that are not "reasonably available"

• Nominal government benefits may not be worth the expense to the SNT of obtaining the benefits

+ Government benefits alone may be insufficient to provide fully for Beneficiary's basic support needs (especially housing), and SNT may have to "make up the difference"

• Drafting attorneys should not prohibit disbursements by Trustee of SNT for shelter-related and household expenses, but Trustee must be mindful of the impact on means-tested benefits if such disbursements are made 

+ Detailed list of permissible expenditures by special needs trust preferred by Trustee and Beneficiary

Permissible "routine" expenditures for the Special Needs Trust Beneficiary, that should not affect his means-tested benefits, could include:

• reasonable compensation of SNT 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 (see POMS SI oo835.465.D.l)

• pre-paid funeral and burial arrangements (note: if the Beneficiary dies before arrangements have been pre-paid, no payments for same may be made from the SNT until after Medicaid pay-back is fully satisfied, under POMS SI 01120.203.B·3·b)

• 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 horne, 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)

• cableTV

• 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