Special Needs Trusts
A Special Needs Trust, also referred to as a Supplemental Needs Trust, is a specialized trust designed to benefit an individual with a disability. Most people with disabilities are entitled to government benefits including Supplemental Security Income (SSI), MediCal and HUD Housing Assistance. However, in order to qualify for government benefits the person with the disability must have limited assets. If you want to leave money or property to a loved one with a disability without jeopardizing government benefits a Special Needs Trust is often the best estate planning approach. There are two types of Special Needs Trusts, First-Party Special Needs Trusts and Third-Party Special Needs Trusts.
Third-Party Special Needs Trusts
A Third-Party Special Needs Trust is the most commonly used trust to benefit a person with special needs. With a Third-Party Special Needs Trust, the disabled beneficiary does not own or have control over the assets in the trust. Family members typically create this trust and leave money and property to the trust through their will, living trusts, life insurance and other beneficiary designations. The trustee of the Third-Party Special Needs Trust, which is usually a family member, then uses the funds in the trust for the support and benefit of the person with special needs. Funds in this trust may be used for a wide variety of life enhancing expenditures including trips and vacations, entertainment, furnishing and electronics, supplemental education and tutoring, and transportation, including the purchase of a vehicle to name a few.
The trustee must abide by strict trust requirements and make sure the trust funds are not used in a manner that would jeopardize the beneficiary’s eligibility for government benefits. Specifically, funds from the trust must never be distributed directly to the beneficiary with special needs. Instead, the trustee pays third parties directly for the goods and services for use and enjoyment by the beneficiary.
First-Party Special Needs Trusts
Unlike Third-Party Special Needs Trusts, which are funded by property owned by someone other than the beneficiary with a disability, First-Party Special Needs Trusts are funded with assets owned by the person with special needs. These trusts typically become necessary when a person with special needs acquires funds or property through personal injury awards, life insurance or inheritance before a special needs trust has been established on their behalf. If the First-Party Special Needs Trust is created properly, the assets can be used to benefit the person with special needs without jeopardizing eligibility for government benefits.
There are different types of First Party Special Needs Trusts. The first is referred to as a “Payback” or “(d)(4)(A)” trust which references the federal statute authorizing these trusts. “Payback” trusts are created with the assets of the person with special needs who must be under the age of 65. These trusts can be established by the person with the disability if mentally competent, a parent, grandparent, legal guardian or a court. And, most significantly, “Payback” trusts require that upon the death of the beneficiary, any funds remaining in the trust must first be paid to the state to reimburse for Medical expenses paid on the beneficiary’s behalf over the course of his or her lifetime.
The second type of First Party Special Needs Trusts are commonly referred to as "Pooled Trusts". These trusts pool the resources of many persons with special needs and are established and managed by non-profit organizations. Individual accounts are set up for each beneficiary who joins the pooled trust and each beneficiary receives distributions from their own account. Unlike individual special needs trusts, pooled trusts may be created for beneficiaries of any age and may be created by the beneficiary. Although there are no “payback” requirements to the state upon the beneficiary’s death, any funds remaining in the account upon the death of the beneficiary are held in the “pooled trust” for the benefit of the other disabled beneficiaries. “Pooled Trusts” typically work well for people with limited assets who cannot justify the costs associated with creating and maintaining an individual trust and/or do not have a trusted family member or friend who can serve as trustee.
When a person with a developmental disability turns 18 years of age that person is considered an adult in the eyes of the law. Parents and/or legal guardians can no longer make important life decisions for this family member, including medical decisions and where the person lives, without the appropriate legal documents in place. A conservatorship will allow the parents, or family members, who have cared for the developmentally disabled person to continue to do so once he or she becomes an adult.
There are several types of conservatorships. A limited conservatorship of the person applies to an adult with a developmental disability who is unable to provide for his/her personal needs. A limited conservatorship of the person is established when a court appoints a trusted person (the conservator), usually a family member, to protect and care for the person with the developmental disability (the conservatee). A limited conservatorship of the person generally grants the following powers to the person appointed as the conservator:
- Decide where the conservatee resides.
- Access to the conservatee’s confidential records or papers.
- Consent or withhold consent to marriage or entrance into
a domestic partnership on behalf of the conservatee.
- Enter into contracts on behalf of the conservatee.
- Give or withhold medical consent on behalf of the conservatee.
- Control the conservatee’s social and sexual contacts and relationships.
- Make decisions regarding the education of the conservatee.
The limited conservator is also responsible for providing the developmentally disabled adult with food, clothing, shelter, medical care and general well -being. Preparation of the court documents required for a limited conservatorship of the person can generally take 3-4 months. If you want to establish a limited conservatorship for someone who will soon be 18 years of age you should plan ahead. Otherwise, you can establish a limited conservatorship at any time after the person with the disability turns 18 years of age.