New clients frequently come to us after they have been told that they need to “get” or “set up” a special needs trust. They often don’t realize that there are different kinds of special needs trusts. Sometimes a self-settled special needs trust is the right answer. In some cases the right approach is a third-party special needs trust. Sometimes the right answer is no trust at all — or a completely different trust type. What’s the difference, and what is the usefulness of each trust type?
Terminology differences
The difference between third-party and self-settled special needs trusts is confusing enough. To make matters worse, some commentators and professionals insist on using the term “supplemental needs trust” or “supplemental benefits trust” to describe one type or the other — or sometimes both. Without widely accepted standard terms, it can be much more difficult to distinguish the different types of special needs trusts.
Beyond that, the key distinction is between trusts that are self-settled and trusts that are established by a third party. That distinction is not as easy to describe as it might seem, though. Many trusts established by a parent, for example, are really self-settled. That is the case, for instance, when the money going into the trust actually belongs to the beneficiary. The trust might be set up with proceeds from a personal injury settlement, or from an unrestricted inheritance.
Such a trust is self-settled even if the beneficiary takes no part in signing, funding or regulating the trust. And just to keep the confusion level high, the same kind of trust may sometimes be referred to as a first-party special needs trust. Or a first-party supplemental benefits trust, or … you begin to see the language confusion, no doubt.
On the other hand, when the trust’s money comes from an outside source the trust is almost always referred to as a third-party trust. This might be the case, for example, when a parent or grandparent plans for a child or grandchild with a disability. The third-party special needs trust is generally more flexible, more helpful and less expensive to administer than a self-settled special needs trust. But that’s a story for another newsletter.
Self-settled special needs trusts and public benefits
The main goal of most special needs trusts, of course, is to maintain the beneficiary’s eligibility for needs-based public benefits. That usually means Supplemental Security Income (SSI) and Medicaid (in Arizona, AHCCCS or ALTCS) benefits. Sometimes it might also mean food and housing supplements.
Why try to maintain public benefits for someone who has inherited money, or received a personal injury settlement? Because the cost of medical care, particularly, can often dwarf any benefits otherwise available from the use of the money. Even someone with a significant personal injury settlement, for example, might exhaust all their resources in a matter of months if they do not continue to qualify for public benefits. Besides that, someone who has benefited from care arrangements for years needs continuity in those services.
In order to permit continuity of care and help preserve an individual’s assets for more than just their medical care, federal law has long permitted individuals to establish self-settled special needs trusts for their own benefit. There are, of course, some basic rules. One is that the funds remaining in the trust at the death of the beneficiary should first go to pay back any state Medicaid agency that has provided care. Another requirement: the trust’s funds should be used only for the benefit of the original owner of the money.
What else do you need to know about self-settled special needs trusts?
There are a number of rules and principles that you should understand regarding self-settled special needs trusts:
- These trusts should only hold the assets originally belonging to the beneficiary. Once there is a self-settled special needs trust in place, the beneficiary’s family members should make a separate plan for any money then intend to leave (or give) to the beneficiary. That might mean that there are two — or more — trusts for the beneficiary. An experienced attorney will be very helpful in sorting out how that can work, and how it can benefit the person with a disability.
- Self-settled special needs trusts often — but not always — require court supervision. In Arizona, the AHCCCS or ALTCS offices providing medical care to the beneficiary almost always review the trust. In Arizona, again, the trustee must give AHCCCS an annual prediction of how the money will be spent.
- Because AHCCCS views itself as a beneficiary of the trust (note: not every state takes the same approach), the AHCCCS administration must be given annual reports on the trust’s assets, income and expenditures. They have the ability to object to the account information, though they seldom do.
- On the death of the self-settled special needs trust’s beneficiary, the only expenditures that should be made are for taxes and trust administration. The trustee can not even pay for funeral or burial costs for the beneficiary. That means that pre-paid funeral/burial plans should be made — using trust money — well before the beneficiary’s death.
- The trust’s expenditures need to be for the benefit of the person with a disability. That sometimes can mean paying for companions and caretakers — even family members — but trustees need to be very careful. Expenditures that benefit family members more than the main beneficiary will likely get the trustee into trouble.
Getting help
Self-settled special needs trusts can be very beneficial to the beneficiary — and his or her family. Trustees should understand the limitations and restrictions, but should not be paralyzed into inaction. Talk with a lawyer who is familiar with special needs trust issues about your duties and opportunities. Legal fees are a completely legitimate expenditure of trust funds, and you should take advantage of the available professional help.
How do you find a capable special needs trust attorney? If you are in Arizona, you’re reading about one right now. If you are not in Arizona, you might look at the Special Needs Alliance website for guidance. The Special Needs Alliance is an invitation-only group of lawyers who emphasize special needs planning and trust administration. Members are spread around the country, and are a safe bet when you are looking for competent, caring, focused lawyers.
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