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Analytic Rehabilitation

Special Needs Trusts

by Kristen Lewis Denzinger

This is one of many planning options now available to secure the financial future of people with disabilities.

Planning for people with disabilities is an emerging legal specialty bringing new hope to individuals with physical and mental challenges. Many of us have a relative, friend, or colleague who is challenged on a daily basis by some type of incapacitating physical, mental, or developmental disability. 

In the past, the families of people with disabilities often kept their personal circumstances a secret; the disability of a loved one was a taboo subject not openly discussed. To make matters worse, few competent professional advisors were available to help plan for the "special needs" of these individuals. Left on their own, many disheartened families had limited options to ensure appropriate care for relatives after their primary caregivers died or grew too old and infirm to provide the necessary care.

NEW HOPE

Much has changed in the emerging area of financial planning for people with disabilities. Law schools now routinely offer courses that address this population’s special needs. As a consequence, the number of lawyers focusing on elder law, disability planning, and government benefits planning has increased dramatically. These specialized lawyers can render legal advice that more fully meets the needs of the disability community. 

Joining forces with these lawyers is an array of allied professionals, such as life care planners, rehabilitation specialists, disability-specific support groups, and legislative advocates. Together they provide ready access to valuable resources for people of all ages who are challenged by incapacitating disabilities. (For example, an innovative "Virtual Resource Center" is being developed by the Georgia Brain Injury Association.)

PUBLIC-PRIVATE FUNDING OF SPECIAL NEEDS

One of the biggest concerns voiced by families of people with disabilities is how best to fund their long-term personal and financial needs in a manner that will secure for them a full—and fulfilling —lifestyle geared to their specific abilities and preferences. Increasingly, lawyers recommend the special-needs trust (SNT), a flexible and effective option to provide for immediate and future benefits of individuals with disabilities. This planning vehicle can be established and customized to address the unique circumstances of each family facing the daunting task of securing the future of a loved one with a disability. Careful drafting of the SNT can allow the disabled beneficiary to become and remain eligible for need-based government benefits such as Medicaid and Supplemental Security Income (SSI), which often serve as a significant source of funding for the beneficiary’s special needs.

Contrary to popular belief, such government benefits are not just for people who are poor. Federal and state laws permit (and even encourage) SNT planning, which maximizes the use of all available resources, private as well as governmental, in order to provide fully for the needs of people with disabilities. For individuals of limited means, government programs may constitute the primary source of funding for current and future needs.

Surprisingly, government assistance is often also available to families with more significant resources to help meet certain basic needs of their relatives with disabilities. These families can then use their personal resources to provide for nonbasic needs and quality-of life enhancements. Thus, the disabled  person first taps into any government benefits to which he or she is entitled, and then the family’s private assets serve as a secondary source of support to supplement—not supplant—such government benefits. Families from all economic backgrounds hail this public-private partnership as an effective means of funding the special needs of people with disabilities. The cornerstone of this partnership is the SNT. 

WHICH IS BEST?

Typically, an SNT is set up as a fund that is privately and professionally managed and administered by a corporate trustee for the sole benefit of a person with disabilities or other impairments (the beneficiary). There are two basic types of SNTs: General Support, and Supplemental Care.

The majority of SNTs are Supplemental Care, designed to serve as a secondary source of benefits for the beneficiary after all available government benefits have been exhausted. The assets of a properly drafted Supplemental Care SNT are not considered "available resources" for purposes of qualifying the beneficiary for need-based  benefits.

By contrast, any property in a General Support SNT, designed to serve as the beneficiary’s primary or sole source of benefits, would be considered an available resource of the beneficiary, which can preclude eligibility for need-based benefits.

To determine which type SNT is most appropriate for a disabled beneficiary, the primary consideration is whether the assets and resources belonging to, or otherwise available to, him or her are likely to cover fully the cost of support and care during his or her lifetime. If such assets and resources are likely to be sufficient, a General Support SNT may be appropriate.

However, if the beneficiary’s assets and resources are inadequate to fund fully all the special needs (as is more often the case) and need-based government programs could constitute a critical part of funding, then a Supplemental Care SNT may be in order. Most families who undertake SNT planning want to maximize all available resources, including government programs. For that reason, the Supplemental Care SNT is by far the more frequent choice.

FLEXIBLE & COMPREHENSIVE CARE

"Special needs" is a broad term encompassing not only medical and healthcare services and products but also a wide range of related services and "quality of life" options that may be tailored to the beneficiary’s particular circumstances. For example, once a person’s medical needs are adequately provided for, the SNT may help fund the cost of additional service providers, such as domestic and personal assistants to aid him or her with the "activities of daily living," or attendant and respite care to give the primary caregiver a much-needed break. The SNT can purchase a customized, accessible van or other appropriate vehicle and pay the cost of its maintenance, insurance, and periodic replacement. 

Similarly, SNT assets can be used to pay for beneficial living arrangements, including additions or renovations to the beneficiary’s residence to render it accessible, the cost of a communal or assisted-living arrangement, or a "luxury" skilled-nursing facility.

Other common SNT disbursements include funds for: 

Permissible disbursements from an SNT are limited only by the creativity of the drafting attorney and the overriding requirement that the beneficiary derive the primary benefit.

ESTABLISHING & FUNDING A SPECIAL-NEEDS TRUST

An SNT may be established under a Last Will and Testament or inter vivos (i.e., during life). It may be funded by a third party (such as a parent or other relative) or with the beneficiary’s assets. 

If the SNT is "self-settled" (funded with the beneficiary’s assets), federal law requires that at the beneficiary’s death the trust must reimburse Medicaid (or other government medical providers) from the property then remaining in the SNT (if any), up to the full amount of medical benefits previously paid on behalf of the beneficiary. Only after this "payback" requirement is fulfilled may other individuals (e.g., the beneficiary’s descendants or siblings) share in any remaining trust property.

Under federal law, a qualifying, self-settled Supplemental Care SNT has two additional requirements. The beneficiary must:

For people over age 65 who want a self-settled Supplemental Care SNT, federal law provides only one option: a "pooled" SNT in which numerous people with disabilities of any age may participate. For example, in Georgia, such a pooled SNT is operated under the auspices of The Georgia Community Trust, which benefits disabled individuals who reside within the state.

By contrast, a third-party SNT—one funded with assets not belonging to the beneficiary—is not subject to the payback requirement described above. All property remaining in this type at the beneficiary’s death may be distributed to others as the Trust Agreement directs. Thus, it is essential that the assets of third-party SNTs are not commingled with the assets of self-settled SNTs, which would unnecessarily subject the assets of the third-party SNTs to the payback requirement. A further advantage is that third-party SNTs have no age limitation or specific disability requirement as with self-settled SNTs, since third-party SNTs are not subject to the federal law that authorizes self-settled SNTs.

COORDINATION IS KEY

A word of caution: After a Supplemental Care SNT is established for a beneficiary, all future trusts for the benefit of that person must also be drafted as Supplemental Care SNTs. A non-qualifying SNT or any outright transfer (such as a gift, bequest, or intestate share to which the beneficiary becomes entitled) will constitute an "available" asset or resource for purposes of maintaining the beneficiary’s eligibility for need-based benefits. This in turn has the effect of rendering even a properly drafted Supplemental Care SNT ineffective for the beneficiary.

Therefore, it is imperative to coordinate planning efforts with others who may wish to benefit the beneficiary of a preexisting Supplemental Care SNT. In order to facilitate the necessary coordination with the least amount of inconvenience and expense to those who wish to provide for the beneficiary, it is helpful to use a "standby" Supplemental Care SNT, which may serve as a common receptacle for gifts, bequests, and other transfers from third parties for the beneficiary’s benefit. In this fashion, other donors may simply "incorporate by reference" the provisions of the pre-existing standby SNT and need not arrange to include a full set of SNT provisions in their own wills or other instruments of transfer.

TRUSTEE CONSIDERATIONS

Since the administration of an SNT is highly labor-intensive, the required fiduciary tasks are generally best performed by a professional trustee, such as a bank or trust company. Although it may appear that the parents, guardians, or other family members of the beneficiary would be sensible candidates to assume the office of trustee of the SNT, the law in some jurisdictions specifically precludes these individuals from serving in that capacity. In many cases, they are often the presumptive remainder beneficiaries of the SNT after the beneficiary’s death; thus, they might be tempted to "skimp" on disbursements for the beneficiary to help ensure that a larger fund is available after his or her death for distribution to the remaindermen.

Using a corporate trustee avoids this concern and also ensures that the SNT’s management will not be interrupted by the incapacity or death of individuals who might otherwise serve as trustees. Appropriate trustee selection is critical to an SNT’s effectiveness. Many variables must be evaluated and considered in this regard, including the proposed trustee’s prior experience administering SNTs, and the relevant fee schedule that would apply to the SNT.

Most corporate fiduciaries charge an annual fee of at least one percent of the value of the trust principal under management. This is a comprehensive fee that covers numerous services, including investment advice, tax reporting, and fiduciary bookkeeping. However, if the SNT principal is relatively modest, it may not be cost-effective to use a corporate trustee in the context of a privately administered SNT. In that case, a pooled SNT, such as The Georgia Community Trust, may be a more cost-effective option, albeit one with fewer investment alternatives and other collateral services. 

IDENTIFYING QUALIFIED LEGAL SPECIALISTS

Although public demand for SNT planning is clearly on the rise and increasing numbers of lawyers are choosing to practice in this area, many estate-planning attorneys remain unfamiliar with the concept and operation of SNTs. As a result, general practitioners often choose to associate as "co-counsel" with an attorney proficient in SNT planning when such specialized expertise is needed. 

State Bar associations may be a good starting point for identifying attorneys with particular expertise in SNT planning. Professional organizations such as the National Academy of Elder Law Attorneys may also be of assistance in identifying local attorneys specializing in this emerging area of law.

THE FUTURE IS BRIGHT

People with disabilities and their concerned families no longer need to contemplate a grim future with limited options. At long last the public has a heightened awareness of the many planning options available to secure the future of individuals with disabilities. This, coupled with the swelling ranks of professional advisors able to render competent advice in this emerging area of law, bodes well for the disability population and those who tirelessly provide the best care for them.

COPYRIGHT 2003, Paralyzed Veterans of America, by Permission of PN/Paraplegia News.