About Special Needs Trusts
Frequently, in my elder law practice, I have the task
of helping clients with the creation of Special Needs Trusts for the
benefit of persons with disabilities. Such trusts help preserve an
inheritance or financial windfall for an individual receiving governmental
welfare entitlements, such as Supplemental Security Income or Medicaid. The
Omnibus Budgetary Rehabilitation Act of 1993 (OBRA ‘93) profoundly
redefined the concept of the Special Needs Trust, and its inter-workings
with welfare entitlement programs.
Special Needs Trusts (SNTs) can generally be divided in to first party
or third party trusts. The first type is created with a special needs
beneficiary’s own funds received from various outside sources; for example,
a will bequest or personal injury award. The third party SNT, on the other
hand, is created with funds from assets belonging to someone other than the
special needs beneficiary; for example, a parent’s or grandparent’s bequest
by will.
SNTs are considered grantor trusts for IRS purposes. As such, taxation
of income is reported on the beneficiary’s return, for whom a K-1 is
provided. The appropriate practice is to prepare a 1041 with a “grantor
letter.”
One must take into consideration the various ways in which certain
governmental programs interact with SNTs with regard to income, resource,
transfer and disbursement issues. Generally, the SNT must be restricted to
providing the disabled beneficiary with only “special needs” or items that
do not supplant what monthly Supplemental Security Income (SSI) payments
are meant to provide (i.e. food and shelter).
When dealing with Supplemental Security Income and its effect upon SNTs
one must be aware of the rules involving expenditures made from a Special
Needs trust account for the benefit of an SSI recipient. Otherwise, the
amount that an SSI recipient receives each month for his/her Supplemental
Security Income may be reduced, and may otherwise have disastrous effects
upon the recipient’s other related entitlements, such as Medicaid.
One such expenditure rule goes by the name of “In Kind Support and
Maintenance” (“ISM”). Disbursements from an SNT might be viewed through a
three step formula to better understand the effects such expenditures will
have upon the SSI disbursement and related welfare entitlement programs:
- Disbursements from a
SNT for purposes other than food or shelter will not reduce a
beneficiary’s SSI monthly payment as long as that disbursement is made
directly to a third party,
- Disbursements of
cash directly to the beneficiary will reduce the recipient’s benefits
dollar for dollar until the SSI payment is totally eliminated, which
may then result in the loss of the recipient’s valuable Medicaid
medical coverage,
- Disbursements from
the SNT for the benefit of the recipient directly to third parties for
items of food or shelter (referred to as “In Kind Support and
Maintenance”) will result in a maximum reduction of an SSI monthly
payment to approximately one-third of its original amount, but never
beyond the “presumed maximum value”.
Conclusion
Special Needs Trusts serve to raise the very quality of life of welfare
entitlement recipients who might otherwise be doomed to a more meager
existence as dictated by these programs’ income and resource caps. Not only
would some of life’s more basic amenities be denied, but more critically,
essential services would simply not be met; such as dental care and other
types of medical care not covered under Medicaid, and which the recipient
could never afford, but for the resources available in the Special Needs
Trust. As long as the trustee is able to pay for these goods and services
directly to third party venders, the reduction of the SSI recipient’s
monthly SSI payment will not be reduced beyond a set maximum value. Hence,
the recipient’s valuable Medicaid coverage will not be lost.
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