Magazine article The Exceptional Parent

Special Needs Trust: Which Kind Is Right for You?

Magazine article The Exceptional Parent

Special Needs Trust: Which Kind Is Right for You?

Article excerpt

Introduction. Many parents of children with disabilities are aware of the "third-party" Special Needs Trust--that is, one which they establish and fund, either during their lifetime (an inter vivos trust) or under their Will at their death (a testamentary trust). Such a trust is the standard estate planning device used by parents to provide for a child with disabilities who is receiving government benefits. The key feature of this type of Special Needs Trust (SNT) is that it is funded with the assets of someone other than the disabled beneficiary.

However, the authors of this article are frequently contacted by clients whose children with disabilities have unexpectedly come into money of their own. For example, they may have received an inheritance, received life insurance proceeds, or received retirement account benefits from a deceased grandparent. Sometimes they have been involved in personal injury or medical malpractice litigation and have now received a settlement. These children are then immediately in jeopardy of losing any "needs-based" public benefits they are receiving, such as Social Security Income (SSI) or Medicaid, unless something is done quickly, usually within 30 days of the receipt of the funds.

Fortunately, federal legislation passed in 1993 authorized "self-settled" Special Needs Trusts--SNTs funded with assets belonging to the disabled trust beneficiary. Like the third-party trust noted above, the self-settled SNT is intended to preserve the beneficiary's eligibility for public benefits while still allowing the beneficiary to get full use of the trust assets. Such trusts can be of great benefit to a child with disabilities who comes into money. But first, some background.

The General Rule for Self-Settled Trusts. When Congress enacted the Omnibus Budget Reconciliation Act of 1993 (OBRA '93), part of its purpose was to add further restrictions to so-called "Medicaid Qualifying Trusts." These were self-settled trusts funded by SSI and Medicaid recipients that gave the trustee full discretion to determine the amount of any distributions back to the SSI or Medicaid recipient. Following OBRA '93, when an individual establishes a trust with his or her own assets, the general result is going to be one of two things:

1) The trust assets will be considered fully "available" to the individual for purposes of Medicaid or SSI eligibility and therefore required to be spent down to a minimal level. This is true even if the trust is "irrevocable" and even if the trustee is given complete and absolute discretion in determining if, when, and how distributions from the trust will be made.

2) Or, if the trust is irrevocable and also prohibits the trustee from making any distributions of principal to the individual, then the trust assets are not considered "available," but they are treated as having been "transferred" to the trust. herefore, the individual will be ineligible for a period of time to receive either Medicaid or SSI. (1)

The OBRA '93 Exceptions. But in OBRA '93 Congress created three exceptions to this general rule: the d4A "payback trust," the d4B "disability income trust," and the d4C "pooled trust." (2) Assets held in one of these trusts will not disqualify the trust beneficiary for public benefits. In addition, the transfer of the individual's assets into an OBRA '93 trust will not create any period of ineligibility and therefore not interrupt the individual's receipt of public benefits. So an OBRA '93 trust is a tool that continues to be available to permit a Medicaid or SSI recipient to benefit from money he or she acquires without losing eligibility for the public benefits.

Assets which might be used to fund an OBRA '93 trust can include accumulated income, gifts, and inheritances previously received from friends or family, and personal injury or medical malpractice litigation recovery or settlement amounts.

General Requirements: An OBRA '93 trust must meet certain requirements that apply to all SNTs. …

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