Special Needs Trusts: Protecting the Benefits of a Person with Disabilities

By Anthony S. Rachuba, IV, Esq.
Fitzpatrick Lentz & Bubba, P.C.

Special Needs Trusts are important estate planning tools which should be considered by all families in which a member of the family is receiving, or may be eligible to receive, Medical Assistance (also known as MA or Medicaid), Supplemental Security Income (SSI) and/or Mental Health and Mental Retardation (MH/MR) benefits. A Special Needs Trust allows a person with disabilities to continue to receive the above benefits. Whereas if the disabled person were to own the assets that are in the trust outright in his or her individual name, such benefits would be taken away (if the disabled person was already receiving the benefits) or the disabled person would not be eligible to receive the benefits in the first place (if the disabled person applied for the benefits while already owning assets in excess of a specific amount allowed under the law).

There are three different types of Special Needs Trusts which must be considered when planning to preserve a disabled person’s right to receive Medical Assistance, Supplemental Security Income and/or Mental Health and Mental Retardation benefits.

Third Party Special Needs Trust

The first type of Special Needs Trust is a Third Party Special Needs Trust which is typically created for the benefit of a disabled person and funded with money or other assets from a third person such as a parent or grandparent. A Third Party Special Needs Trust cannot be funded with the assets of the disabled person. The Trust can be created as a separate trust which can either be funded by a gift from the third party to the Trust during his or her lifetime or through the third party’s bequest to the Trust upon his or her death. The Trust can also be created under the terms of a Will which is funded at the death of the third party. A Third Party Special Needs Trust must provide that all distributions are to be made at the discretion of the trustee, and that such distributions shall be made to supplement, and not supplant, the benefits the disabled person is receiving or may receive in the future. A Third Party Special Needs Trust should be considered whenever a family member wants to leave assets to the disabled person upon the family member’s death. If proper planning is not done, and the disabled person receives the inheritance outright, then a First Party or Self-Funded Special Needs Trust must be created to preserve any governmental benefits.

First Party Special Needs Trust

The second type of Special Needs Trust is a First Party Special Needs Trust or more commonly referred to as a Self-Funded Special Needs Trust. Self-Funded Special Needs Trusts were first authorized under the Omnibus Budget Reconciliation Act of 1993, and are now permitted under federal statute, specifically 42 U.S.C. §1396p(d)(4)(A). A Self-Funded Special Needs Trust is funded with assets belonging to the disabled person and is typically created when a disabled person receives proceeds from a lawsuit or receives an inheritance outright which would otherwise cause the disabled person to lose the government provided benefits that were being received.

Some of the requirements for establishing a Self-Funded Special Needs Trust are (1) it must be created by a parent, grandparent, guardian or a court; (2) in Pennsylvania, it must be approved by the Office of General Counsel; (3) it must be for the sole benefit of the disabled person who is under the age of 65; (4) it must provide that the trustee has total discretion as to distributions from the Trust and that distributions shall be to supplement, and not supplant, the benefits the disabled person is receiving; and (5) it must contain a “payback” provision which provides that upon the death of the disabled person, the remaining assets of the Trust will first be used to pay back the Medical Assistance benefits that were paid to the disabled beneficiary during his or her life. Any remaining assets not used to pay back Medical Assistance benefits can pass to whoever is named as the contingent beneficiary(ies) under the terms of the Trust.

Pooled Trust

The third type of Special Needs Trust is a Pooled Trust. A Pooled Trust can either be established by a third party with funds belonging to the third party, or it can be self-settled and funded with the assets of the disabled person. If a self-settled Pooled Trust is the type of trust that is chosen, it must be created by a parent, grandparent, guardian, court or the disabled person. A Pooled Trust combines the assets of numerous disabled persons for investment purposes only, but each person has his or her own account within the Pooled Trust.

A Pooled Trust is ideal in a situation where the total value of the assets that are to be placed in trust do not justify the creation of a separate Special Needs Trust as described above. A nonprofit agency must serve as the trustee of the Pooled Trust. Upon the death of the disabled person, the balance held in the Pooled Trust account must remain in the Pooled Trust for the other disabled beneficiaries of the Pooled Trust.

A Special Needs Trust should be a part of a person’s estate plan if any assets are going to be left to a person who is disabled and who is entitled to, or may be entitled to in the future, Medical Assistance, Supplemental Security Income and/or Mental Health and Mental Retardation benefits. For most families, it is important to provide for the ongoing care and support of a disabled loved one, and through the use of a Special Needs Trust, families can leave assets for the benefit of a disabled family member, and the disabled family member can still receive government benefits and programs.

Anthony S. Rachuba, IV, Esq. is a member of the Estate Planning and Administration group at Fitzpatrick Lentz & Bubba, P.C. Mr. Rachuba’s practice focuses primarily on taxation, estate planning & administration of estates and trusts, oil & gas law, and special needs trust planning. He frequently speaks and publishes on the subject of essential estate planning documents. Contact Mr. Rachuba at 610.797.9000 or [email protected]