As with most areas of estate planning, special needs trusts (“SNT”) evolve and are molded by state and federal statutes, court decisions, and the Social Security Administration’s own rules. The purpose of this article is to explain how the Program Operations Manual System (“POMS”) has changed special needs trusts over the last several years. The update to POMS was on May 6, 2018, and was became legal starting July 1, 2018. The new rules included in this update aim to change the focus of the Social Security Administration from that of hyper-technical to more reasonable and easily understandable. With over 20 years of experience, Antonoplos & Associates skilled attorneys can help guide you through the many complex issues associated with special needs trusts law.
What is a Special Needs Trust?
Government benefits are for needs-based individuals suffering from old age, blindness, or disabilities. Persons with disabilities can receive medical benefits and a small amount of income for food and shelter. To qualify for these benefits, an individual suffering from one of the disabilities must be under an income threshold. One way for persons with disabilities who have received a sum of money to continue receiving Medicaid or Supplemental Security Income (“SSI”) is to create a special needs trust and then place their assets in this device. One key restriction is that an individual can only set up this type of trust if they are under the age of 65. One can fund this type of irrevocable trust with the income and/or resources of an individual with disabilities or from a third party.
The first way that this type of trust can be funded is through a First Party. One creates and funds this type of SNT by the beneficiary and has a payback to the state Medicaid agency upon the termination of the Trust. The other option for an SNT is to create a Third-Party Funded Special Needs Trust—commonly referred to as a Supplemental Needs Trust. You fund this SNT with monies from someone besides the beneficiary. Furthermore, you do not have a payback to the state upon termination. Either SNT option can be useful to help your child pay for items and services not provided for by benefits. Common services or items paid for by an SNT includes transportation, clothing, entertainment, and unreimbursed medical expenses.
Additional Benefits to Special Needs Trusts
The main reasons for setting up a special needs trust have been outlined, there are a few more benefits associated with the third party funded trusts:
- Choosing a Trustee. Creating any type of trust requires that you name a trustee to the account. This person will manage investments and the distribution of assets. For someone with special needs, a trustee plays a key role. This person watches over the assets and spending habits of the beneficiary. A trustee will be important to make sure the assets within the trust last as long as possible. Thus, make sure that you name an initial trustee and a successor trustee. This protects your assets in case the initial trustee would ever become unavailable to watch over the account.
- Designating Assets and Providing Support After Death. Another benefit of a special needs trust is that you can choose exactly how some of the assets will be spent. For example, you could specify that you want a certain amount of dollars spent per year on new furniture. Or, you could request vacations or other amenities geared towards improving the overall quality of life. Creating these types of clauses when you first fund the trust is important. It will allow you to ensure that your child will receive the care you desire after you pass away. Finally, a special needs trust provides many benefits. However, one of the most important is that your child will continue to receive care after you die.
- Protecting Assets from Creditors. One final benefit to establishing a special needs trust is that you are able to protect your child’s assets from creditors. Creditors cannot take assets in a special needs trust to pay compensatory damages. This is especially important if your child were ever in a lawsuit.
The purpose of a special needs trust is clear. This trust allows someone to shelter their funds. Additionally, they will continue to have access to government benefits such as Medicaid or SSI.
How to Establish a Special Needs Trusts
The recently revised POMS focuses on the special needs trust exception in relation to Medicaid and SSI rules. The Social Security Administration concludes that assets in a properly established SNT do not count when determining eligibility for government needs-based programs.
There are a few important benchmarks that an SNT must meet for it to be determined a valid trust. These characteristics include:
- A trust which is established for an individual who is under age 65 and disabled; and
- is established for the benefit of such individual through the actions of a parent, grandparent, legal guardian, or court; and
- provides a payback to the State(s) up to all amounts remaining in the trust. This occurs upon the death of the individual or earlier termination of the trust up to the amount of total medical assistance paid.
To be valid, a special needs trust must meet each provision if made on or after January 1, 2000.
One major change to these guidelines occurred on December 13, 2016. On this date, the President signed into law the 21st Century Cures Act. Section 5007 of the Act states that individuals now have the power to establish their own SNT. This is a major advantage for individuals who became disabled later in life. They can now have more control over their assets while easily receiving government benefits.
Before this act was established, if the individual did not have a guardian and the individual’s parents were deceased or unavailable, someone with disabilities had to create a petition in their local Orphans court to establish an SNT. It takes a long time to move a petition through an Orphans court. Thus, many individuals close to 65 years old could not create an SNT because it was not established quickly enough.
How Age and Disability Affects Special Needs Trusts
As previously mentioned, a Special Needs Trust must be created before an individual is 65years old. Furthermore, an SNT must also be funded before the individual’s 65th birthday. Any funds transferred to an SNT before the individual turns 65 will be exempt from consideration for Medicaid and SSI. This creates another potential problem. If someone were to receive an inheritance, the individual would have to spend a certain amount of money. This can be impracticable but is the only option before they would again be eligible for Medicaid and SSI. This is the case even in the individual had established a valid SNT prior to their 65th birthday.
New funds added to an SNT would temporally disqualify an individual from receiving government benefits. However, any interests or dividends earned from accounts in the SNT do not invalidate the Trust. This is true even after the individual turns 65. Additionally, if an individual placed an annuity, structured settlement, or a support payment into their SNT and received a payout from one of these accounts after they turned 65, these new funds are not counted towards eligibility for Medicaid and SSI.
An important change to annuities placed in SNT accounts occurred in 2015. The Howard P. “Buck” McKeon National Defense Authorization Act (“NDAA”) allowed an annuity from a military Survivor’s Benefit Plan (“SBP”) that was placed in an SNT to be exempt from counting for eligibility of Medicaid and SSI. Before passing this law, a service person’s disabled child had to choose between foregoing the annuity or potentially losing all of their benefits.
Further Notes on Age and Disability
Understanding each of the exceptions mentioned above is critical to maximizing your financial benefits including Medicaid and SSI. To recap, any interest, dividends, annuities, or support, that you receive that are in an SNT before maturity, these funds will not count against your government aid eligibility. However, if you receive funds from these accounts and then transfer the funds into your SNT account, they will count against your Medicaid and SSI eligibility.
One final point is that for an SNT to be valid, an individual must have been considered legally disabled at the time the account was established. However, the individual does not have to be in or receive SSI or Medicaid when creating the SNT.
SNT’s established by the Guardian and Courts
Before the update of POMS, the Social Security Administration only considered SNT’s properly established by a court if they specifically stated that they were establishing a trust. This was an issue as many Orphan courts only approved the SNT but did not specifically enumerate the Trust’s creation. In cases like this prior to the update of POMS, all of the funds that went into a Trust were counted against the individual’s Medicaid and SSI eligibility.
To combat this informality, the new POMS allows the SNT exception once a court creates the trust. The best way to quickly have a court establish an SNT is to have an unsigned version of the SNT. You will then specifically request that the court establishes the trust and its funding. Additionally, giving the court a signed document and asking them to simply approve the trust is illegal. Thus, you do not need settlor to sign the Trust. Instead, you must keep the documentation stating the approval of your trust by a court order.
In situations involving an incapacitated person that still needs an SNT, the legal guardian can establish the trust. However, in cases like this, a guardian cannot transfer funds of any kind into a trust without court approval. One tip for guardians of incapacitated individuals is to establish a trust through the court. After they create a trust, the guardian—from what the court tells them—should fund the Trust. This process ensures that every step is from court regulations so there is less of a possibility for issues in the future.
SNT’s established by Parents and Grandparents
Parents and grandparents are the obvious parties that would establish an SNT for a person with disabilities. Prior to the establishment of the 21st Century Cures Act a parent or grandparent could create a special needs trust for a capacitated adult while avoid acquiring a court petition. After creating a trust for an individual or the age of 18, the parent or grandparent could simply fund the trust.
After the 21st Century Care Act was established, the Social Security Administration stated that parents or grandparents can still establish a “seed” trust with their own monies. This is unless the State where the individual and their parents reside allows “dry” trusts. Seeding a trust simply means that an individual places an asset into the trust immediately. Dry trusts, on the other hand, is a tool that simply allows someone to say they will transfer an asset into an individual’s trust at a certain date. If the parents did not seed the trust correctly, assets within the trust will count towards an individual’s eligibility for Medicaid and SSI.
This can lead to difficult financial situations. An induvial could have been receiving Medicaid and SSI benefits for months before they receive a flag for improper creation. In this case, the individual has to pay back benefits or medical expenses to the government.
SNT’s established by the Individual after December 13, 2016
As stated at the beginning of the article, the 21st Century Cures Act, allowed individuals with disabilities to establish their own SNT trust. Since an individual can now create their own special needs trust, an agent acting under a power of attorney is also able to create an SNT. One important distinction is that if a disabled individual has their parent or grandparent establish their trust, it must still be properly seeded. Otherwise, they risk having to pay back government benefits.
If someone who has a disability establishes their own special needs trust, they must be considered the trust settlor. If not, they would technically have power over the funds located in the trust. This leads to invalidating the SNT.
A special needs trust is a crucial tool to ensure financial success for people with disabilities. First, the benefit of creating this type of trust is to allow a person with special needs to receive Supplemental Security Income (SSI) and Medicaid. Secondly, a special needs trust pays for items or services such as transportation, clothing, entertainment, and unreimbursed medical expenses. Being able to receive important government benefits yet have the additional income required to achieve a good quality of life. As such, special needs trusts play such an important part in financial planning for those who have a disability. As such, receiving knowledgeable representation is key to securing your child’s financial future. Antonoplos & Associates is here to guide you through any issues associated with special needs trusts in DC, Maryland, and Virginia.
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For more than 20 years, Antonoplos & Associates has practiced estate planning with a focus on special needs trusts. Finally, we represent clients throughout DC, Maryland, and Virginia.
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