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Special Needs Questions and Answers

Q.      What is a "special needs" trust?

A.      "Special needs" is just a term to describe any trust intended to provide benefits without causing the beneficiary to lose public benefits he or she is entitled to receive.

Q.      What kinds of public benefits do special needs trust beneficiaries receive?

A.      Each special needs trust can be intended to protect different public benefits. Most commonly, special needs trusts are intended to permit Supplemental Security Income (SSI) and Medicaid recipients to receive additional services or goods.

Q.      What is a "supplemental benefits" trust?

A.      Some lawyers prefer to use the term "supplemental benefits" rather than "special needs." Occasionally the term "supplemental needs" is used. All are interchangeable, and describe the purpose of the trust.

Q.      Who can establish a special needs trust?

A.      Anyone can establish a special needs trust. There are two general categories of such trusts: self-settled and third-party trusts. A third-party special needs trust is established by one person for the benefit of another. The person establishing the trust, called the settlor (or grantor or, sometimes, trustor) chooses to make some of his or her own assets available for the benefit of the disabled beneficiary. Third-party special needs trusts are often established, for example, by parents for their developmentally disabled or mentally ill children.

Q.       What special rules govern third-party special needs trusts?

A. There are actually few rules governing third-party special needs trusts. Since the beneficiary was never entitled to the money in the trust, the most important rule is simple: the trust terms should not create any entitlement to either income or principal by the beneficiary. If the trustee has complete discretion whether to make distributions for the beneficiary, the trust principal and income will usually not be counted as available.

Q.      What can a third-party special needs trust provide for the trust beneficiary?

A.      The cardinal rule for special needs trusts is that the trust may not provide food, shelter, or any asset which could be converted into food or shelter (including cash), to the beneficiary. In other words, the trust can provide for physical therapy, medical treatment, education, entertainment, travel, companionship, clothing, furniture and furnishings (such as a television or computer), and some utilities (like cable television and a telephone, but not electricity, gas or water). Distributions of cash to the special needs trust's beneficiary are almost never permitted (though even this central rule may have some limited exceptions).

Q.      Can a special needs trust be used to purchase a home, or pay rent, for the beneficiary?

A.      Yes, but there are several caveats. There are special rules affecting the use of special needs trusts (or any third-party payment) for shelter. Those rules are very difficult to navigate, and depend heavily on the beneficiary's situation; secure competent legal advice before making any decision about the provision of shelter.

Q.      What is a self-settled special needs trust?

A.      Sometimes a public benefits recipient may obtain assets that result in ineligibility for continued benefits. In such a case, it may be advisable to place assets into a special needs trust to regain, or continue, eligibility for government benefits.

Q.      What types of assets might an individual place in a self-settled special needs trust?

A.      Self-settled special needs trusts are often established by individuals who have received a personal injury settlement (perhaps, but not necessarily, arising out of the incident that caused the disability) or inheritance. More rarely, individuals with pre-existing wealth determine that it would be advisable to create a special needs trust.

Q.       If the special needs trust is actually established by a guardian, or a court, is it still "self-settled?"

A.       Yes. Federal law makes it clear that a trust established with assets which would have belonged to an individual, or his or her conservatorship, is self-settled regardless of who signs the trust instrument.

Q.       Why would someone with assets want to place his or her money in a special needs trust just to qualify for government benefits?

A.      Many services available from the public sector are extremely expensive when paid for privately. Some are practically unavailable except through the public system.

Q.      What restrictions are placed on self-settled special needs trusts?

A.      Self-settled special needs trusts are much more complicated than their third-party equivalents. For example, most self-settled special needs trusts will have to include a provision repaying state Medicaid agencies for services the agency provided upon the beneficiary's death.




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