“Disability” or Self-Funded Trusts. These trusts, recognized by federal and state statutes, are established with property or funds belonging to the person with the disability. It does not apply to trusts funded with property of someone other than the person with the disability. These would be third-party trusts, which are discussed below. The disability trust may be established for any person under the age of 65 years. The law requires that the trust is established by the person’s parent, grandparent, guardian or the court. Finally, the primary remainder beneficiary, at the death of the disabled beneficiary, must notify the state department that provides the person’s benefits. The state may be reimbursed to the extent that the state paid expenditures for medical assistance under Medicaid.
Third-Party-Created Trusts. Trusts funded by someone other than the beneficiary are third-party trusts. A third-party trust may benefit a person with a disability as long as it is a special needs trust. This kind of trust may be established either as a living (or “intervivos”) trust or a testamentary trust (created by a will).
Living Trusts. The living trust is ideal for a parent who wants to create a trust for a child who has a disability but does not want the child to lose eligibility for public benefits. If there are other family members who want to leave something by will but do not want to create a special needs trust in their wills, they can merely make use to the existing trust. The parent, of course, can make either lifetime gifts or a gift-by-will to the trust.
Testamentary Trusts. To create a testamentary trust, the parent merely makes a will and includes in it a special needs trust for the child with the disability. This avoids the complication of the intervivos trust but does not afford other relatives the vehicle to leave a devise to the disabled child without the relative having to do the same.
The simple definition of special or supplemental needs is anything that constitutes non-support items, in other words, paying for anything the beneficiary wants for personal use that is not in the category of food or shelter (support expenses). A trust that is deemed special needs cannot provide food or shelter expenses, or the trust will be deemed an available resource. The following should be considered:
- Support expenditures are defined in the Social Security Procedures and Operations Manual System (POMS).
- It is easy to say “no food or shelter,” but it can be tricky. For example, basic utilities such as gas, water and electricity are basic shelter expenses that cannot be paid by the trust. Utilities such as telephone and cable service are not basic and can be paid by the trust.
- Food cannot be purchased by the trust, but food supplements can. Non-consumable items such as toiletries, cleaning supplies and personal care items can be provided by the trust.
- Personal use by the beneficiary is important. If the beneficiary wishes to purchase something that is a legitimate purchase for the trust but intends it to be used by someone else, the purchase may not be allowed.
- As of March 9, 2005, there is no limit on the value of household goods as long as they are reasonably necessary for the person to live in his or her residence. Computers, furniture and appliances are acceptable purchases.
- Purchase and maintenance of a motor vehicle, as well as paying the insurance, is allowable. A motor vehicle is an exempt resource if used for the beneficiary. Other transportation expenses may be paid by the trust.
- Travel expenses, including a companion, can be paid by the trust. Travel expenses may include travel, accommodations and meals.
Sole and absolute discretion for distributions by the trustee is essential for any supplemental needs trust.
- There can be no way in which the beneficiary can “legally” compel distribution from the trust.
- That does not mean that the trustee cannot ask the beneficiary what he or she wants (or vice versa). But the final decision is with the trustee.
- Prior approval by the trustee is important. The beneficiary should not incur a debt and then expect the trustee to pay for it.
- All purchases by the trust should be paid directly out of the trust. The trustee should never turn over cash to the beneficiary to buy a desired item. Cash is equivalent to support in terms of public benefit eligibility.
If the trustee is uncertain as to whether or not an expenditure constitutes a special or supplemental need, he or she should consult an attorney or other professional who is knowledgeable and specializes in special needs trusts. Expenditures that are prohibited by federal or state regulations, or other mishandling of the trust, can result in the beneficiary being disqualified from public benefits.