General Information on Special Needs Trusts.
A “Special Needs Trust” is a trust established by a disabled person with their own money (usually an inheritance, accident settlement or drug or malpractice settlement). The purpose of this trust is preserve the money to use to supplement the government benefits the disabled person receives without disqualifying the disabled person from eligibility for such governmental benefits. These trusts are authorized by statute but have important restrictions. The purpose of this article is to describe some of these restrictions.
Important Restrictions on Special Needs Trusts.
There are important restrictions on Special Needs Trusts and the powers of the Special Needs Trust Trustee. In general:
- The trust must be irrevocable. The Trustee cannot just decide to terminate the trust. It is normally best to spend all the money in the Trust on the beneficiary, rather than try to terminate the Trust.
- The trust assets can only be spent for the sole benefit of the disabled person. It is not acceptable to make gifts to others or to pay for gifts to others even if that would please the disabled person. Nor is it acceptable to pay for someone to go somewhere with the disabled person, eat with them etc. unless a doctor certifies that it is medically necessary. Even then the amount paid must be reasonable.
- Distributions can only be made by the trustee purchasing items or services directly from a third party on behalf of the disabled person. No cash or cash equivalents can be given to the disabled person, even to reimburse the disabled person for expenditures.
- The money in the trust should not be used to replace or duplicate money that a governmental program would otherwise provide.
A Special Needs Trust Trustee should determine what governmental programs the disabled person is on or could qualify for and what the asset or income rules are that would disqualify the disabled person from that program. For instance, Supplemental Social Security requires that the person’s assets must be under $2,000, exclusive of tangible personal property and a homestead.
Regular periodic payments from the Trust may count as income under some needs based programs like public housing. If the person is in public housing, the distributions are not prohibited but will reduce the disabled person’s benefit. Some housing programs count all distributions, not just periodic ones, as income and you may need to be prepared to contest the rent increase. So, the Trustee needs to make sure that the Trustee does nothing to disqualify the disabled person from any given government program or is at least mindful of the consequences of distributions.
The Special Needs Trustee needs to ascertain what benefits the disabled person can obtain from the government. For instance if the disabled person would qualify for a wheel chair through Medical Assistance, the Trustee should not purchase the wheel chair using Trust funds but rather help the disabled person get the wheel chair from the government program. If the disabled person wants extra features, it is legitimate for the Trust to purchase those features.
A very important limitation on Special Needs Trusts, is that if the disabled person receives Supplemental Social Security, the assets of the Special Needs Trust cannot be used to pay for shelter or food. If the disabled person has a home or apartment, the Trust can pay for a hotel while the disabled person is traveling. But the Trust cannot pay for the disabled person to stay in a hotel all the time. An occasional meal at a restaurant or while traveling can be considered entertainment. But the trust cannot pay for the person to eat in a restaurant regularly. It is safest to avoid paying for restaurant meals as much as possible.
The Special Needs Trust restriction that often poses the biggest problem is the prohibition against giving money directly or indirectly to the beneficiary. All payments from the trust have to go to third party vendors to purchase goods or services. It is not acceptable for the disabled person to buy a computer and bring the receipt to the Trustee for reimbursement. The Trust has to buy the computer directly from the store. This may seem like a silly rule and like it glorifies form over substance but it is an important rule and is strictly enforced.
What is acceptable:
· Check written from the Trust to the vendor.
· Trustee putting the purchase on the Trust’s own credit card.
· Allowing a high functioning disabled person to buy things using the disabled person’s own credit card but submitting the statement and receipts to the Trustee who then pays the Credit Card Company directly (but only for items that the Trust can pay for under the rules of the programs that the disabled person is on).
What is not acceptable:
· Giving cash to the disabled person.
· Giving cash to someone other than the disabled person without getting receipts or before an item is purchased.
· Arranging for the disabled person to have a gift card or unrestricted debit card.