Special Needs Trusts: How to Write Them and How to Use Them

Special Needs Trusts: How to Write Them and How to Use ThemPresented By:Martha C. Brown, Esq.Russell A. Fracassa, Esq.

What is a Special Needs Trust?

Also known as a supplemental needs trust

To “supplement,” not replace, public benefits for disabled person

What is a Special Needs Trust?

In this context – any type of disability as defined by Social Security at 42 USC 1382c(a)(3)

Different forms of SNTs codified in Omnibus Budget Reconciliation Act in 1993 (OBRA ’93)Self-Settled or 3rd PartyInter vivos or TestamentaryFacts and Circumstances will

determine type of trust

What is a Special Needs Trust?

Three types of SNTs(d)(4)(A)(d)(4)(C)Third Party SNT

What is a Special Needs Trust?

What is a Special Needs Trust?

Trust Type (d)(4)(A), Self-Settled

(d)(4)(C), Pooled Third-party SNT

Established by Parent, Grandparent..

Individual, Parent… Other than disabled

Assets Funding Disabled person Disabled person Third person

Beneficiary Disabled person only Disabled person Anyone

Grantor Trustee No No Yes

Distributions To third parties To third parties To third parties

Payback Yes Yes No

Disability SSA Definition SSA Definition SSA Definition

GiftTax Exclusion Cannot use Cannot use Can use

Testamentary No No Yes

Age Limit Funded by 65 No (check state) None

Frequent used for PI or Inheritance Same but lesser Any use

Drafting Considerations

Not just a form Risks

Loss of client benefitsAttorney malpractice

Drafting Considerations

Grantor trust provisions for income tax See I.R.C. §§671-679 Net income taxed to beneficiary

Not on the IRS Form 1041 Typically lower tax rates

Supplemental Security Income (SSI) Social Security Disability Insurance

(SSDI)

Know the Public Benefits

Supplemental Security Income (SSI)Needs Based

• Limited income and assets

Know the Public Benefits

Supplemental Security Income (SSI)Medicaid Qualification

• Some states is automatic qualification• MO, not – still have Medicaid qualification

• Less than $1,000• Non-countable resources

• Home• One car• Pre-need burial agreements…..

Know the Public Benefits

Social Security Disability Insurance (SSDI)Not means-testedNo financial eligibility requirementsMedicare Qualification

• 24 months after receiving SSDI• Some exceptions to the waiting period

Know the Public Benefits

Distribution Standards

Discretionary vs. Support Discretionary

No standards for trustee discretion Support

Support requirements UTC – Distinction eliminated

Support trusts are discretionary trusts with support standards

Distribution Standards

Should only contain pure discretionary distribution standards

Not give a beneficiary any right to compel a distribution

Trustee to have “sole,” “uncontrolled,” “absolute” discretion

Distribution Standards

Avoid toxic language as “support and maintenance”

Avoid “Health, education, maintenance and support” language

Highly recommended to spell out grantor’s intent to supplement and not to supplant public benefits

Choice of Trustee

Family members often have little fiduciary experience

Family members often do have superior knowledge of the disabled person

Educate family member trustee Utilize co-trustees include a family

member Courts may desire or require

professional trustees

Distributions from the Trust

Concept of “in-kind support and maintenance” (ISM)

Payments for necessities of life such as food or shelter

Treated as income to beneficiary Dollar-for-Dollar reduction in benefits

Limited to one-third

POMS

Social Security Administration’s Program Operations Manual System (POMS)

Many changes and clarifications in 2009

POMS

Changes affecting drafting Spendthrift clause – required Revocation & termination – available Child support & maintenance – not income Payback – cannot be limited to time Sole benefit – no other persons to benefit Legal authority to establish the trust required Seed trust

POMS

Changes affecting administration Distributions that are income Distributions that are not income Distributions not for the benefit of beneficiary Distributions for credit cards Distributions for Gift Cards/Certificates

Pooled Trusts

Transfers As of today, no penalty for transfers

occurring at any age Sole benefit Account may be established by beneficiary Payback provision