Articles Posted in Special Needs Trust


On March 3, 2015 the Eighth Circuit Court of Appeals, sitting in Denver, Colorado, rendered an opinion in the case of Draper v. Colvin, where it explicitly admitted that it drew “a hard line” when it upheld the decision of the Social Security Administration that denied Stephany Draper eligibility for supplemental security income. Draper v. Colvin, 229 F.3d 556 (8TH Cir. 2015). Ms. Draper was an 18 year old woman who suffered traumatic brain injuries in an automobile accident and applied for supplemental security income benefits. In addition, she filed a personal injury case where she netted approximately $429,000 from the settlement. This amount of money would render Ms. Draper ineligible for both supplemental security income as well as Medicaid, both of which are means based programs.


Congress resolved these issues when it created loopholes to allow for special needs trusts that provide for beneficiaries, yet considers them as non-countable assets when applying for supplemental security income and Medicaid. The loophole found at 42 U.S.C. 1396(d)(4)(A) requires that the special needs trust must be set up by a third party and not the beneficiary herself. The parents of Ms. Draper created a special needs trust that they believed would render her eligible for both supplemental security income and Medicaid, as the money from the personal injury case would not be enough to provide aid to Ms. Draper for life. The Social Security Administration disagreed, as the parents created the trust in their capacity as agents for Ms. Draper, acting under the power of attorney. When Ms. Draper’s parents tried to correct the deficiencies, likely in an effort to appease the Social Security Administration and make the issue a non-issue, the Social Security Administration was still not satisfied. Most specifically, the parents sought a Court Order from the same trial Court that had jurisdiction over the personal injury case, approving the trust and retroactively dating it back to the date of the original trust. These amendments still did not comport with the statutory mandate, as the seed money for the trust was still Ms. Draper’s settlement proceeds.


Throughout the life of the Draper case, the Social Security Administration’s Program Operations Manual System (POMS) was continually referenced, as it helped to guide and justify the Social Security Administration in much of its decisions. The Draper case is a warning to all that the Social Security Administration will require strict adherence with all of the statutory mandate, as well as the POMS. For a trust to be considered a non-countable asset, the following must occur, and in this order

  1. The trust must be created by someone other than the disabled person. If a parent creates the trust they can seed the trust account with a nominal amount, signing off on all relevant documents as the “grantor”. If for some reason a parent, grandparent or other relative cannot create the trust, the disabled party can petition a Court to establish a trust. The Court Order should indicate that the Court is the grantor establishing the trust. This was a material fact in Draper, as the Eighth Circuit deemed that the Trial Court did not establish Ms. Draper’s trust.
  2. After the trust is established by a third party, any personal injury proceeds may fund the trust. The person that deposits money into the special needs trust account or transfers title and ownership to property may act in their capacity from a power of attorney for the beneficiary.

Maintaining government eligibility for a disabled child or family member is extremely important for their long term care needs because such programs will often be the primary source for medical care throughout their life. A special needs trust is a way to supplement the needs of a child or loved one without risking program eligibility. Special needs trusts include self-settled trusts (grantor and beneficiary are the same person) and third-party trusts.


Establishing a Special Needs Trust

In many ways a special needs trust is established just like many other kinds of trusts. Special needs trust differ with respect to some specific provisions on the use and disposition of trust assets. Any special needs trust should clearly illustrate the purpose of establishing the special needs trust as providing supplemental benefits for the disabled beneficiary without compromising or reducing benefits received through government programs. The terms of the trust should also take into account the source of the trust assets. If a special needs trust is self-settled and funded with the beneficiary’s assets, the trust document must adequately address the requirements of New York and  federal law relating to the treatment of trust accounts and benefits under state plans. Special needs trusts that are settled and funded by parties other than the beneficiary need to provide for discretionary distributions of the trust assets for supplemental support so as to avoid being classified as assets available to the special needs beneficiary. Assets available to the special needs beneficiary will be counted as resources for means-testing for government benefit programs. Other important features of a special needs trust include requirements that the trustee:

  • is empowered to make distributions at their discretion;
  • should consider the settlor’s intention of establishing the trust as a source of supplemental resources, and not in lieu of government benefit programs;
  • is prohibited from making cash distributions to the special needs beneficiary, except as expressly provided by the trust document; and
  • should consider the effect that any distribution may have on eligibility.


Determining if a Special Needs Trust is Right For You

A qualified estate planning attorney can help you determine if a special needs trust makes sense for your estate plan. In determining if a special needs trust is the right tool for your situation, you will have to consider the applicable government program that the beneficiary will need, as some programs may not be means-tested and thereby reduce the need to restrict resources through a special needs trust. If you do decide a special needs trust is right for you, it is critical to have the appropriate provisions in the trust document to ensure that eligibility for needed public benefits is unaffected by the existence of the trust.

If you have included a special needs trust as part of your estate plan, you need to know the importance of making sure the distributions from that trust are permissible per the terms of the trust and do not defeat the purpose of the trust by affecting eligibility for needed government programs.


Effect of Distribution

A special needs trust is one way to supplement the needs of a disabled loved one without compromising eligibility for means-tested government benefits, including Supplemental Security Income and Medicaid coverage. With respect to means-tested programs, federal law will require a reduction in benefits to the extent the beneficiary receives income or assets are otherwise made available to the beneficiary. For example:


  • cash distributions from a special needs trust to the beneficiary will generally reduce benefits dollar for dollar;
  • distributions made to third parties for food and shelter for the beneficiary will reduce benefits (“food and shelter” include food, mortgage payments, property taxes, rent, heating, gas, electricity, water, sewer, and garbage removal); and
  • distributions of property made to third parties for the beneficiary that are not easily converted to cash, food, or shelter will likely not serve to reduce benefits, but property that can be easily converted to cash will be considered as cash equal to the fair market value of the property.


Distributions That Will Not Affect Benefits

De Minimis Gifts. With respect to Supplemental Security Income, the above rules do not apply to the first $20 per month received by the beneficiary, regardless of purpose or form

Certain Personal Items and Transportation. Payments for the purchase of items such as clothing and furnishings will not serve to reduce benefits so long as such items are not included as food or shelter. Transportation provided to the beneficiary is also excluded as an available resource and will generally not affect benefits.

Burial and Funeral Arrangements. A special needs trust may purchase burial space and pre-pay funeral costs for the beneficiary without penalizing the beneficiary or being included as an available resource.

Loans to the Beneficiary. A special needs trust may extend a bona fide loan to the beneficiary. It is important that any loan include feasible payment terms and be sufficiently documented.

Educational and Vocational Services. Payments for education and vocational services will likely not affect benefits as long as such disbursements are not for food and shelter, e.g., room and board.

Medical Expenses. Any distribution made for medical or dental care will not be characterized as income or otherwise reduce benefits.


Planning Your Distributions

Establishing a special needs trust is a way to help a disabled loved one receive supplemental benefits needed for their care and comfort. When making distributions from a special needs trust to the beneficiary or for their benefit, you need to consider the effect on existing government benefits and eligibility.

If your loved one has special needs or development disabilities, you may want to consider establishing a special needs trust. Also known as a supplemental needs trust, this type of trust is a legal tool used to help disabled people keep more of their income or assets without losing public benefits.

Purpose of Special Needs Trusts

This type of trust was initially created to help parents with disabled children provide for them as they grew up without making them ineligible for public benefit programs, like Social Security and Medicaid. The intent of the trust is to supplement any government benefits that they may receive or to shield excess income for Medicaid purposes.

The Medicaid program requires that participants spend down their assets in order to reach a certain level of need before qualifying for benefits. A special needs trust can be used so that a disabled Medicaid beneficiary can keep the benefit of almost all of their income, instead of using it to pay for care. That income can also be used to qualify a disabled person for the Medicare Savings Program.

If a disabled person under the age of 65 receives a lump sum, from retroactive Social Security or a personal injury settlement, a special needs trust can protect that money and keep that person eligible for government benefits. By transferring the lump sum into a special needs trust the person can remain eligible for all of their benefits and use the money in the trust to supplement their regular income for years to come.

Types of Special Needs Trusts

New York law recognizes three kinds of special needs trusts, but each type of special needs trust comes with its own set of rules, requirements, and registration. The three types of special needs trusts are a first party, third party, and pooled trust.

First Party Special Needs Trust

A first party special needs trust is funded with assets owned by the trust beneficiary. Also known as a “self-settled trust” or “(d)(4)(A) trust,” this type of trust can be established to protect current or future income from, for example, an inheritance or personal injury settlement that would bring the disabled person above the limits for government benefits.

The law requires that the trust must be for the benefit of the individual with disabilities, and it must be established by a parent, grandparent, legal guardian, or the court. It must be irrevocable, and the trust agreement must also include a Medicaid payback provision. This requires the state Medicaid program to be reimbursed upon the death of the beneficiary.

Third Party Special Needs Trust

A third party special needs trust is funded by parents, relatives, or friends of the disabled beneficiary. This type of trust is preferred by parents or other friends and relatives who want to leave an inheritance to a loved one with disabilities. Not only does this type of trust shelter an intended inheritance, it can also be used during the parents’ lifetimes for ongoing expenses that are not covered by government benefits.

A significant attraction of the third party SNT is that, unlike a first party SNT, when the beneficiary dies, there is no Medicaid payback requirement. The person who created the third party SNT (often a parent) chooses and has complete control over selection of the trust remainder beneficiaries.

Pooled Special Needs Trust

A pooled trust is also funded with assets that are owned by the disabled person, like a first party trust. Pooled trusts are established and managed by nonprofit organizations. The assets in the trust are pooled together for investment purposes, but the organization manages a sub-account for the beneficiary. In a pooled trust, the trust beneficiary can establish the pooled trust sub-account on their own.

Families throughout New York who have children with disabilities are frequently questioning how to best provide for their children’s needs–both now and in the future. It can be a complex issue, because relatives must balance their ability to provide help via their own private resources with available support through Medicaid and Supplemental Security Income (SSI). SSI is designed to help those with certain disabilities with basic needs and is funded through general tax revenues, not Social Security taxes.

The government programs hinge on the specific income available to those with disabilities, and so relatives who provide support may unintentionally lead to disqualification of their loved one from Medicaid or lower SSI payments.

Special Needs Trusts in New York
Special Needs Trusts (SNTs) are critical in these situations, allowing parents, grandparents, or others to provide supplemental resources without affecting the individual’s access to important government programs.

SNTs are relatively straightforward in concept, but the specifics of setting them up and using them properly can prove complex. For example, there are two general types of SNTs: First party and third party.

Third party SNTs are usually more common for New York families in situations where a parent, grandparent, or guardian wishes to provide funds for the child. The trust then operates to provide support for the individual with disabilities throughout their life. At death, the remaining assets in the trust are paid out to relatives–the disabled individual’s own children (if there are any), siblings, or other close relatives.

Alternatively, first party SNTs use the disabled individual’s own funds to create the trust–not money provided by others. These are slightly more complicated in that they have a “payback” requirement. The disabled child is able to benefit from the trust funds without losing eligibility in government programs. However, upon the individual’s death, the funds remaining in the trust must be used to pay back the government for benefits received throughout their life.

Because first party SNFs require use of the disabled individual’s own funds and have a payback provision,they are not used as often as third party trusts. However, they may be appropriate in certain situations. Some common examples include: when the child with special needs receives a large inheritance or is granted sizeable funds from a lawsuit verdict or settlement.

Evaluate the Whole Picture
In most cases, the creation of a special needs trust is only done in combination with other planning that may include life insurance, unique inheritance planning, and similar work. Elder law estate planning includes many interconnected parts, and so it is crucial not to view any specific legal tool in isolation. An attorney can explain what combination of steps are needed to best protect you and your family.

Financial Planning News shared a helpful article earlier this month about a difficult situation faced by many New York families: Planning for retirement with a special needs child. If you have a child with various special needs, those circumstances must obviously be built into both an estate plan and a retirement plan.

On the estate planning side, it is important to balance the child’s need for access to public support services and the effect an inheritance may have on that eligibility. In these situations a special needs trust is often critical to meet the needs.

When it comes to retirement planning, the article shares how it is essential to fully understand the future costs for advanced medical care, physical therapy, behavioral therapy, and much more. There is a mistaken assumption that these costs only exist when the child is growing. In reality, even many adult children with special disabilities have significant needs that parents must work into their long-term plans.

Many different long-term retirement strategies hinge on those obligations. Obviously, those planning for retirement may need to increase expected cost of living when funds for a special needs child are added to the mix. One planner interviewed for the story notes that, in general, increased expected monthly allocations by 10-15% is common when caring for a child is part of the mix. To best meet goals it also may require shifting to a conservative portfolio that can better weather storms, downsizing unnecessary assets, and similar details.

There is an obvious intersection between retirement planning and estate planning, however. All advisors will explain that it is critical to keep the child’s eligibility for government programs in mind. This means avoiding disqualifying inheritances in the form of pensions, 401(k)s or similar assets. In fact, this need even exists for many relatively wealthy families. Depending on the child’s needs, even private wealth in the millions can be depleted quite quickly. Taking advantage of available support while protecting those family assets is important.

Special needs trust can help families avoid having to entirely disinherit a child with special needs. However, there are special rules that apply to these trusts and assets can generally only be used in certain ways. It is imperative to understand those rules ahead of time.

There are no one-sized-fits-all answers. Obviously the specific strategies depend on the family’s goals, resources, and the specific special needs of the child. Yet, in all situations, it is absolutely critical not to go it alone. Contact estate planning attorneys and financial planners to at least learn the options out there.

The New York Times published an interesting story last week discussing the “psychic toll” paid by families working to raise a child with special needs. The article attempts to delve into some of the more nuanced issues related to conducting special needs planning to take care of the finances and long-term care issues for these loved ones. The basic tasks–often including things like creating a special needs trust–are not necessarily confusing or complex. However, that doesn’t mean the planning is easy. That is because there are a plethora of mental and emotional challenges that go into this work.

The author explains, for example, that simply deciding on the appropriate living situation for a family member with special needs can be emotionally and spiritually taxing, regardless of the financial issues tied into the decision. Should the child live at home for as long as possible? Is it better for him or her to move into a group home? What happens if the child lives at home but is then forced to move out into unfamiliar territory after the parents pass away? These and many similar questions must be discussed thoroughly to ensure long-term financial plans best matcht the family’s wishes.

On top of that, the story explains how working through this issues must be done in such as way as to ensure other family dynamics are kept intact. Stress and disagreement associated with these challenges has led to many divorces or other family feuds. It is helpful to be aware of these risks and make decisions in a manner that does not destroy important relationships. One frightening and oft-repeated statistic is that 75% of couples with a special needs child ultimately get divorced. Many have challenged that accuracy of that statistic, but it is accepted that various strains are placed on a relationship when raising a child with these challenges. Couples must undoubtedly be proactive in their planning efforts so that the situation is as controlled as possible. Leaving things up to chance and simply taking every new crisis fresh is a recipe for relationship drama.

The articles shares a few examples of couples who have made different decisions about long-term care and financial plans for their children. Some decide to ease their loved ones into group homes. Others have kept them at home and have detailed long-term plans about how the family will help following the event of a parent’s death or disability.

Unfortunately, there are no “quick fixes” in the law to make this planning without stress. However, there is a world of difference between trying to go it alone and having the assistance of professionals who have worked with countless families on similar issues in the past. If you are in New York City, Albany, Fishkill, Middletown, Nyack, Rhinebeck, Saratoga Springs, White Plains, or elsewhere in the state, please take a moment to call one of our offices and see how we can help.

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Special needs trusts are helpful legal tools that allow parents and grandparents to leave behind assets to loved ones with special needs without damaging the beneficiary’s ability to receive SSI and Medicaid benefits. Our New York estate planning attorneys know that in the past the best strategy for these families was often to disinherit relatives with disabilities. Otherwise, assets might be given to the individual which would disqualify them from receive certain federal benefits. Of course this seems a perverse effect and unfair effect for those with disabilities. The special needs trust fixes that. The trust is a device that allows a resident with special needs to receive an inheritance and keep their benefits, all without the state actually receiving less than it likely would otherwise. The trust funds can be used to pay for a wide range of services for the individual like clothing, education, entertainment, household goods, and similar costs. Families have much to gain from taking advantage of this tool.

An article this weekend from Lake County News explored these trusts, distinguishing between the various types of special needs trusts. For example, testamentary trusts and stand-alone special needs trusts are compared. Testamentary trusts are those which are established at the death of the benefactor. Conversely, stand-alone trusts are created while the one passing on the assets is still alive.

One key difference between these trusts is that the stand-alone special needs trust can receive assets from different individuals. Some families may have a few parties that want to help provide for their loved one with special needs. The stand-alone trust, because it is not tied to any single parties’ will or trust, allows for these multiple benefactors. In addition, accessing the funds in the trust can be somewhat easier in a stand-alone special needs trust. That is because the funds are made available to the beneficiary in the stand-alone trust instantly upon the death of the benefactor. Conversely, in a testamentary trust, the assets must first need to be transferred into the trust following the benefactor’s passing.

As all estate planning attorneys will explain, an important consideration in each of these financial preparation efforts is determining if trust assets can be reached by creditors. Because the stand-alone trust usually involves assets being transferred into the trust while the benefactor is alive and solvent, those assets cannot be reached by creditors. They are essentially removed from the benefactor’s estate. Conversely, is the trust is not funded until the death of the individual, then the total assets are subject to creditor claims before they are transferred into the trust.

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A New York special needs trust is usually the premier method for local residents to provide a disabled child with financial assistance without disqualifying them from receiving government benefits like SSI and Medicaid. Our New York estate planning lawyers know that providing adequate resources for children with special needs is particularly important today because of the increasing life expectancy of disabled youth. The resources needed by these individuals are often substantial, necessitating very careful planning. All families in this situation must ensure that they seek out professional assistance to learn what legal arrangements are best for their unique situation. No two families are identical, and so specialized help is essential.

Failure to seek out experienced legal aid when dealing with these trusts often results in government benefit penalties, negative tax consequences, and damaging family turmoil. Earlier this month Special Needs Answers reported on developments in a complex legal case related to family disagreement over a special needs trust. The case stems from a trust that was set up in 2002 for an 18 year old high school student who suffered severe brain damage after suffering a heart attack. A lawsuit was filed and settled on his behalf against school officials who failed to take action which would have limited the brain damage. The settlement funds were placed in a special needs trust.

The young man died five years later without a will. Per the rules of intestate succession in the state, the trust funds–valued at $8 million at the time of the young man’s death–were supposed to be split between his parents. The child had been estranged from his father for most of his life, but the victim’s mother did not discuss her specific family situation when the trust was created. In order to avoid having her ex-husband share in the fund assets, the mother had a disclaimer drafted and convinced her ex-husband to sign it by claiming it was a document related to burial. The former spouse initiated a legal challenge when he eventually learned that he had signed away his share of $8 million. The ensuing legal battle lasted several years. It was only this year that a local court ruled that the mother acted wrongly in trying to deceive her ex-husband into signing the disclaimer. The estranged father will be allowed to collect half of the funds left in the trust.

Advocates are using the case to remind all community members that it is vital to consider family dynamics when drafting a special needs trust. As one involved in the situation explained, “If you are thinking of setting up a trust for a loved one, make sure that you discuss your entire family history with your special needs planner. […] Doing so could avoid this problem and lead to a more equitable outcome for everyone involved.”

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