WHEN DOES YOUR CLIENT NEED A SPECIAL NEEDS TRUST

March 13, 2012

By Barbara A. Isenhour

ISENHOUR BLECK, P.L.L.C.

1200 Fifth Avenue, Suite 2020

Seattle, WA 98101

(206) 340-2200

Fax (206) 382-9109

Barbara A. Isenhour is a 1973 graduate of the University of Washington School of Law. She practiced with Evergreen Legal Services from 1973 to 1996. Since 1996 she and a Legal Services colleague, Sean Bleck, have formed their own law firm, specializing in Elder Law and government benefits for the elderly and disabled. Ms. Isenhour has spoken and written extensively on government benefit issues including Special Needs Trusts and Medicaid coverage for long term care. She is a member of the National Academy of Elder Law Attorneys, the Special Needs Alliance, and the Seattle Estate Planning Council.

TABLE OF CONTENTS

WHEN DOES YOUR CLIENT NEED A SPECIAL NEEDS TRUST

Barbara A. Isenhour

I.INTRODUCTION
II.NEEDS BASED GOVERNMENT BENEFITS
III. SPECIAL NEEDS TRUST ESTABLISHED BY THIRD PARTY

IV. SPECIAL NEEDS TRUST ESTABLISHED BY DISABLED PERSON
V. POOLED SPECIAL NEEDS TRUSTS

VI.COURT RULE 98.16W

VII. TRUST EXPENDITURES AND TRUSTEE DUTIES

APPENDICES

  1. Sample testamentary special needs trust language
  2. Sample language to establish contingent special needs trust in will

I. INTRODUCTION

Attorneys can come into contact with the area of special needs trusts in several contexts. A personal injury attorney may have a disabled client who needs to know if a special needs trust can preserve eligibility for government benefits. An estate planning attorney may have clients with a disabled child or family member who want to know whether a special needs trust should be incorporated into their estate plan. An attorney may advise trustees of special needs trusts who need know what should or should not be done in administering a special needs trust to protect the beneficiary’s government benefits.

Financial planners and insurance sales people may have clients who want to use life insurance as a tool to provide for a disabled loved one. Without proper planning the life insurance may not provide the benefit the insured intended when the policy was purchased.

“Special” or “supplemental” needs trusts are trusts designed to supplement government benefits such as Supplemental Security Income or Medicaid for disabled or elderly individuals. Such trusts can be established with the disabled person’s own assets or by a third party for the benefit of a disabled person. A special needs trust can be an inter vivos trust or a trust established by through a will or other testamentary disposition.

A special needs trust is a way to shelter and preserve assets that would otherwise disqualify the trust beneficiary from government benefits that have a cap on available assets. Special needs trusts are an important estate planning tool to enable elderly or disabled individuals to qualify for or preserve certain government medical or income benefits. A properly drafted trust can ensure that a beneficiary will be able to continue receiving government benefits and at the same time receive benefits from the trust. For some family members, the special needs trust provides peace of mind that a disabled loved one will be provided for even if the beneficiary never will needs to apply for needs based government benefits.

These materials will discuss which government benefit programs require a special needs trust, the drafting requirements for special needs trusts, and guidelines for trustees of a special needs trust.

II. NEEDS BASED GOVERNMENT BENEFIT PROGRAMS

To know when a special needs trust may be appropriate it is necessary to determine what benefits the beneficiary is currently receiving or may receive in the future. Some government benefit programs are limited to low-income individuals. These programs have a limit on the amount of assets and income an individual can have to qualify for benefits. Government benefit programs with a cap on assets and income are often referred to as “needs based” or “asset sensitive” programs.

The purpose of a special needs trust is to shelter assets that would otherwise disqualify the beneficiary from receiving benefits. The following is a brief summary of the most common needs based government programs:

A. SUPPLEMENTAL SECURITY INCOME (SSI)

The Supplemental Security Income or SSI program provides a guaranteed monthly income to low income disabled children and adults and non-disabled low income individuals over the age of 65. The Social Security Administration administers the SSI program. 42 U.S.C.§§ 1381-1383; 20 C.F.R. § 416. The Social Security Administration has a policy manual that is very helpful in reviewing and explaining the SSI eligibility rules. That manual website is

1. Disability Test

To qualify for SSI as a disabled person under the age of 65, the disability test is that the person cannot engage in any substantial gainful employment in the national economy for the next twelve months. Congress has added restrictions to this program for people whose primary disability is substance or alcohol abuse. The disability standard for children is that the disability is sufficiently severe that they would not be able to work if the child were an adult. The disability regulations are at 20 C.F.R. § 416.901 et seq.

2. Income Test

The SSI recipient must have monthly income below the maximum benefit amount (for 2012, $698). Certain income is disregarded in applying the income test: $20 of unearned income per month and $65 plus one half of earned income is disregarded. Income of custodial parents is usually counted as income to a disabled child under the age of 18. 20 C.F.R. § 416.1100 et seq.

3. Asset Test

Nonexempt assets must be less than $2,000 for a single person and $3,000 for a couple. Assets of custodial parents are usually counted as assets of a disabled child under the age of 18. The home, a vehicle of any value, a burial fund of $1,500 and all household furnishings are exempt assets and disregarded in determining asset eligibility for SSI. 20 C.F.R. § 1201 et seq.

B. MEDICAID

Medicaid is a health benefit program for low income elderly and disabled individuals and recipients of Temporary Assistance for Needy Families (TANF) (formerly Aid to Families with Dependent Children or AFDC). The Department of Social and Health Services (DSHS) now referred to as the Washington Health Care Authority, administers the program at the state level. SSI and TANF recipients automatically receive Medicaid benefits. 42 U.S.C. § 1396 et seq.; 74.09 RCW. DSHS has an internal manual for its workers that have more detailed explanations of the eligibility rules. This manual is called EAZ and can be located at

Most of the asset rules for the SSI program apply to Medicaid for the disabled and elderly. The home, a vehiclewith a market value of up to $5,000, certain burial arrangements and household furnishings are exempt assets. In some cases there is no value limit for the vehicle. Nonexempt assets must be below $2,000 for a single person or $3,000 for a married couple. A married couple with one spouse applying for Medicaid benefits for long term care can have up to $115,640 in nonexempt assets and there is no value limit on the car or household furnishings. The Medicaid assets rules are located at WAC 388-470 and the Medicaid income rules are located at WAC 388-450.

Medicaid includes coverage for uninsured hospital and doctor visits, durable medical equipment, prescription drugs, custodial nursing home care, attendant care in the home and care in assisted living facilities or adult family homes.

C. TEMPORARY ASSISTANCE TO NEEDY FAMILIES (TANF)

TANF is an income program for low income families with minor children. As with the SSI program, certain assets are exempt including the home, household furnishings and personal clothing, a car with a market value under $5,000, and a savings account of up to $3,000. Additional non-exempt assets cannot exceed $1,000. TANF is administered by the Department of Social and Health Services (WAC 388-216).

D. VETERANS DISABILITY PENSION

Low income disabled veterans who served in wartime may be eligible for a disability pension. Assets cannot exceed $80,000. The home and one vehicle are exempt assets. The Veterans Administration administers the program. Other income offsets this benefit and the maximum income benefit for 2012 is $12,256 per year.

E. HOSPITALIZATION AT STATEMENTAL HOSPITAL

Medicaid does not cover psychiatric hospitalizations for people over 21 and under age 65. Medicare only covers a maximum of 180 lifetime days of psychiatric hospitalization. For people who are hospitalized at Eastern or WesternStateHospital, and who do not have Medicare, Medicaid or private health insurance that will cover the hospitalization, the state of Washington will determine how much the patient must contribute towards the cost of care. All assets of the patient are factored into the calculation of what the patient must pay. There is no provision for sheltering assets in a special needs trust to qualify for the state funded psychiatric hospitalization program (WAC 388-855-010).

F. PROGRAMS THAT ARE NOT NEEDS BASED

All of the above programs have a limit on assetsin order to qualify for benefits. Some government benefits are not needs based, meaning there is no limit on the amount of assets owned by the beneficiary. In that case the receipt of an inheritance, personal injury settlement or other lump sum will not disqualify the individual from receiving benefits. The following is a list of the most common benefits that are not needs based:

  • Social security disability income (SSDI)
  • Childhood Disability Benefits (CDB)
  • Social security survivors benefits
  • Social security retirement benefits
  • Medicare
  • Veterans Compensation benefits (as opposed to Veterans Pension benefits)
  • Unemployment Compensation
  • Labor and Industries benefits for workers or their dependents

G. WHEN IS A SPECIAL NEEDS TRUST APPROPRIATE

If an individual is receiving or anticipating the future need for any of the government benefits described in Section II. A through E above, receiving assets outright through a gift, inheritance or personal injury settlement may result in the loss of those benefits because of the asset limits in those programs. Medical expenses are often high for many disabled individuals and they cannot obtain or afford private medical insurance. Even though some disability income benefits are low it may be a significant part of a disabled person’s safety net to meet basic needs. As a result, it is often an important goal for family members to provide testamentary or life time bequests to elderly and disabled individuals while still preserving their government benefits. Individuals who become disabled but already own assets above the program limit may want to shelter those assets in a Grantor or self settled special needs trust in order to qualify for SSI and/or Medicaid benefits.

The following two sections review the elements of two types of special needs trusts: a trust established by and funded by a third party and a special needs trust established by and funded by the disabled person. In some ways the trusts are very similar but in other ways there are critical distinctions that must be taken into account.

III. SPECIAL NEEDS TRUST ESTABLISHED BY THIRD PARTY

The requirements for a special needs trust vary substantially depending upon whether the grantor is a third party or is the trust beneficiary and recipient of government benefits. This section discusses the requirements for a special needs trust where the grantor is not the trust beneficiary.

A. EXAMPLES

Typical examples of a third party special needs trust are:

  • Parents who want to set up a trust in their wills for their autistic minor child. When the child turns 18 she probably will be eligible for SSI and Medicaid benefits. At the parents’ deaths their testamentary bequest to a special needs trust for their daughter will not disqualify her from receiving SSI and Medicaid if needed by the daughter.
  • Parents have a son with schizophrenia who is periodically hospitalized at Eastern StateHospital. The assets they leave in a special needs trust for their son will not disqualify their son from receiving state funded psychiatric hospital care while he is under the age of 65 or receiving Medicaid assistance to pay for the psychiatric care after the age of 64.
  • An elderly couple in poor health who each want to leave their estate to the surviving spouse. It is likely the surviving spouse will need nursing home care. Each spouse leaves their estate to a special needs trust for the surviving spouse. When the surviving spouse’s half of the estate has been spent down to $2,000 he or she would be eligible for Medicaid benefits to pay for the nursing home care. The testamentary special needs trust established by the deceased spouse will not be considered an available asset. The trust can be used to pay for additional care not covered by Medicaid.
  • An elderly woman would like to leave a testamentary bequest of $20,000 to her brother who is in a nursing home where Medicaid pays for his care. By leaving the bequest to her brother in a special needs trust, the brother’s benefits will continue uninterrupted. The trust can be used to pay for a private room at the nursing home and pay for a companion to come to the home to read to her brother.

An outright gift may be counterproductive if a family member or friend wants to provide for an elderly or disabled individual who is receiving needs based benefits with an asset cap. If a testamentary or inter vivos gift is made to a properly drafted special needs trust, the trust corpus will not be considered an available asset to the trust beneficiary.

While the trust corpus may not be considered an available asset, distributions from the trust may be considered income to the beneficiary in the month the distribution is made. This may temporarily reduce government benefits dollar for dollar in the month of distribution only. See Section VI. below for a further discussion regarding this issue.

B. REQUIREMENTS FOR A THIRD PARTY SPECIAL NEEDS TRUST

The following are the essential requirements of a third party special needs trust:

  • Trust distributions must be discretionary with the trustee.
  • The trust should not be a general health support and maintenance trust. A mandatorysupport trust would be an available asset in determining eligibility for government benefits. A marital or credit shelter trust can be drafted as a special needs trust so that the trust corpus will not be considered as an available asset but any mandatory income distributions will reduce government benefits dollar for dollar.
  • The beneficiary cannot have control over the administration of the trust. The beneficiary should not have the power to remove or nominate the trustee, terminate the trust or control distributions of income or principal.

C. DRAFTING TIPS

To make it clear that the trust is not a general support trust, there should be language in the trust that the intent of the Trustor is to direct the trustee to supplement but not replace government benefits. It is not necessary, however, to prohibit the trustee from making any distribution that will reduce or eliminate government benefits. It is preferable to give the trustee discretion to determine if a distribution from the trust is appropriate even if it will reduce government benefits temporarily. It is also possible that it will be in the best interest of the beneficiary to forego governments at some times and have the trust replace the government benefits. Many third party special needs trusts are drafted with language that is unnecessarily restrictive and harsh in how trust assets should be used to benefit the beneficiary.

The following is a common but unnecessarily restrictive way to draft the supplement needs language:

The trustee shall not under any circumstances make any distributions to my daughter that will reduce or eliminate any government benefits she is receiving or may receive in the future. Under no circumstances shall the trustee pay for food, clothing or shelter from the trust estate.

The beneficiary of the above trust is Susan, a 30-year-old brain injured adult who receives SSI and Medicaid benefits. The trust was established for Susan in her father’s Will. Susan has just been evicted and the trustee would like to help her with the expenses to move into a new apartment.

As drafted, the trustee would not be able to pay Susan’s first and last months rent to enable her to move into a new apartment. Under the SSI rules, such a payment would reduce her SSI benefit dollar for dollar in the one month the payment was made. If the payment was made directly to the landlord, the payment of shelter would result in a reduction of approximately 1/3 of Susan’s SSI benefit amount.

If the trust had been drafted as follows, the trustee would have had the discretion to make the one time payment, even though it would result in loss of the SSI and Medicaid benefits in the one month the rent payment is made:

The primary purpose of the Trust is to provide for Susan’s special needs resulting from her disabilities. If Susan is receiving government benefits based upon need or disability, from any local, state, or federal government program, the trustee shall have discretion to supplement those government benefits. No disbursement shall be made for Susan that would permanently jeopardize eligibility for, or inappropriately limit the type of assistance available to her, if she is receiving or intends to apply for local, state or federal benefit programs. If Susan is not receiving government benefits based upon need or disability, the Trustee shall have the absolute and sole discretion to determine what disbursements shall be made from the trust estate for Susan’s benefit.