Special Needs Trust
Special needs trusts are usually set up by clients who have disabled children, who may be receiving supplemental Social Security (SSI) benefits or other federal or state assistance. These trusts are designed so that the parents can offer their disabled child some benefits without disqualifying them for the government assistance, most of which are means-tested, provided if the child has no other significant resources. These types of trusts can also be used for disabled parents.
Medicaid benefits are extended only to those disabled recipients who have minimal assets or income. Hence, a primary goal of the special needs trust is to design the trust so that government benefits are used to meet the basic needs, such as food, clothing, shelter, while the trust provides supplementary needs, such as medical care, special equipment, utilities, education, job-training, or entertainment.
To qualify for the program, many parents will transfer assets that are considered exempt assets under Medicaid, such as a personal residence in which a spouse resides, but not the proceeds of life insurance, annuities, IRAs, pension benefits, or other sources of money or income, since such resources, unless they are significant, can be quickly depleted in caring for a disabled child.
Medicaid Eligibility for Trust Beneficiaries
Sometimes trusts are used to support an individual in such a way so that they qualify for Medicaid — a federal program administered by the states that provides medical care for people who cannot afford it. Generally, eligibility for Medicaid will include trust income and principal to the extent that the beneficiary can access those funds. For instance, if the beneficiary is also the settlor, then all the trust funds that are available to the settlor-beneficiary will be included as resources available to the Medicaid applicant.
If the beneficiary is not the settlor, then all the trust income and principal that the beneficiary should receive or could demand will be considered as part of resources available for her use. Hence, mandatory trusts that must pay a certain amount will be included in the beneficiary's income as well as income that must be paid out by a support trust for the support of the beneficiary. However, if the trust is irrevocable, then only those funds that are available to the beneficiary will be included in the beneficiary's assets, unless it is a testamentary trust created by the spouse's will or if the trust was created for a disabled person and the trust document specifies that the government will be paid for all unreimbursed medical expenses after the beneficiary dies.
Because the government is providing basic support for the individual, spendthrift clauses in discretionary trusts do not apply, and so could demand payment from the trust to the same extent that the beneficiary could. However, there is an exception for a supplemental needs trust that exists to provide support for medical services that the government does not cover.
The trustee is required to cover the needs of the disabled but without making them ineligible for public assistance. Thus, the special needs trust does not provide basics, such as food, clothing, shelter, or medical care. If the trust assets can be used to pay for basic living expenses, then the government may treat the trust assets as available and compel the trust to pay for the basic needs of the disabled or the government may even compel reimbursement of government payments already received. Instead, the special needs trust usually pays for health expenses, special transportation for the child, occupational therapy, and other educational services.
To exclude trust assets as a resource for support, the access must be restricted, structured much like a trust used for asset protection. The trust document should specifically provide that the trustee will not be permitted to pay for items covered by public assistance programs. Otherwise, the trust assets will be considered an available resource for the support of the disabled child. An independent trustee should be used and the trust should be an irrevocable trust, but one that is created as a testamentary trust, at the death of the last surviving parent. The trust should have contingent beneficiaries, such as other children, who would become the beneficiaries if the trust assets are being sought by government officials to cover the expenses of the disabled, even providing a destruct clause, terminating the trust and distributing it to the contingent beneficiaries.
Special needs trusts are also often used to hold the proceeds of a lawsuit and may be established by a parent, guardian, or the court. The trust document should specify special payback provisions, stipulating that Medicaid will be reimbursed for any medical assistance granted to the beneficiary.
Beneficiaries should be specified for the trust to receive the assets after the disabled child dies. The trust can be revocable or irrevocable, but is generally advised to be irrevocable. Parents can also act as trustees, but many authorities advise using a disinterested 3rd party.
The tax code, specifically IRC §529, has been amended to allow a new type of account called the ABLE account or 529A account to help families save private funds to support individuals with disabilities. Based on the Achieving a Better Life Experience (ABLE) Act of 2014 and modeled after 529 educational accounts, 529A accounts were designed to supplement — but not supplant — private insurance benefits, Medicaid, employment, and other sources. Previously, assets exceeding $2000 would disqualify the disabled from public benefits like Medicaid and Supplemental Social Security Income (SSI).
Like other 529 plans, the states must provide the legal foundation to create the accounts — they are not established by federal law — and as of February 2017, only 14 states have done so, including Alaska, Ohio, and Virginia. Also like other 529 plans, taxpayers do not have to live in the state to use a state's 529 plan, an account can be set up in any state, regardless of where the taxpayer or child lives.
Cheaper and easier to set up than a special-needs trust, anyone can contribute, but total contributions cannot exceed $14,000 per year per beneficiary. Contributions are not tax-deductible, but earnings grow tax-free. However, any amount remaining in the account after the beneficiary's death is claimed by the state to reimburse it for Medicaid expenses.
Earnings are tax-exempt only if the program is established and maintained by a state or its instrumentality, and used to pay for qualified disability expenses, including:
- education, housing, transportation, health
- employment training and support
- assistive technology and personal support services
- financial management and administration
- legal fees and other expenses for oversight and monitoring of the account
- funeral and burial expenses
Officers and employees who control the ABLE program must provide reports as required by the Secretary of the Treasury. A 10% tax penalty applies for:
- distributions that were not used to pay qualified disability expenses
- excess contributions, or
- failure to file required reports.
ABLE accounts not exceeding $100,000 are disregarded for determining eligibility for means-tested federal programs, except for SSI payments for housing expenses. If an ABLE account exceeds $100,000, then SSI payments will be suspended while the ABLE account exceeds $100,000, but will not affect eligibility for Medicaid.
Funds placed in a 529A account by a debtor will be excluded from the debtor's bankruptcy estate if the account beneficiary is the debtor's child, grandchild, stepchild, or step grandchild, but only if the funds are not pledged to obtain credit, the account was not funded with excess contributions, and the funds do not exceed $6225 for a specified time.
While 529A accounts provide advantages for caring for the disabled, there are still additional benefits to having a special-needs trust, including:
- supplementing government programs
- no restrictions on the use of the money as long as it is for the beneficiary, and
- the money remaining after the death of the beneficiary can be left to the family
However, only wealthier families can afford it, since special-needs trusts typically cost $2000-$5000 to set up, and professional trustees who usually manage investing, distributions, and other required duties generally charge 1% of the trust value. People of limited means may be able to use a pooled trust, where assets are commingled with assets of other families and managed by professionals. However, any assets remaining after the beneficiary dies may go to the state or to the organization managing the trust. Although a family member can manage a special-needs trust, many will find that they do not have the skill, inclination, or time to do a good job.
Source: H.R.647 - 113th Congress (2013-2014): ABLE Act of 2014 | Congress.gov | Library of Congress