UNDERSTANDING SPECIAL NEEDS TRUSTS IN CALIFORNIA
Trusts are certainly not the most perspicuous of legal inventions, but they can be a critical part of special needs planning. Experienced professionals understand the nuances of the various types of trusts available, what language is necessary, and which trust would benefit a client in a given circumstance. But for those of us who need a little refresher, let’s get back to the basics and take a dive into some of the lingo and concepts of special needs trusts.
WHAT ARE SPECIAL NEEDS TRUSTS?
A special needs trust is a type of trust specifically used for special needs planning. This trust allows a beneficiary to preserve access to public benefits while being able to benefit from trust assets on some level. As with all trusts, the Trustee manages trust assets for the benefit of the beneficiary.
What about distributions during the lifetime of the beneficiary? The trust can be designed where the Trustee can only make distributions that supplement government benefits, a supplemental distribution standard. One thing to keep in mind is that even if there is a supplemental distribution standard in the trust document, that standard really is discretionary if the beneficiary is not currently on public benefits. The trust document dictates that once the beneficiary is on public benefits, distributions may not supplant, impair, or diminish those benefits.
Or, the trust can be designed so that the Trustee can also make distributions that supplant government benefits, a supplemental and discretionary distribution standard. To supplant government benefits means to replace or decrease those benefits. So, the Trustee may distribute trust assets, knowing that the distribution could decrease the number of government benefits received by the beneficiary if it is in the best interest of the beneficiary. And, of course, the Trustee can also make supplemental distributions.
FIRST-PARTY SPECIAL NEEDS TRUST
A first-party special needs trust also referred to as a d4A trust is a self-settled trust. This type of trust is funded with the assets of the beneficiary, who is also the applicant of government benefits. The assets are used for the beneficiary’s personal benefit only. To curtail a Medicaid transfer penalty, this individual must be under the age of 65 when the trust is established and the individual establishing the trust must be either the beneficiary; a parent, grandparent, or legal guardian of the disabled beneficiary; or a court. If the individual is over age 65, a transfer penalty may be imposed when applying for certain long-term care Medicaid benefits.
The state must be the remainder beneficiary of any funds remaining in the d4A trust after the death of the beneficiary, up to the amount the state expended on benefits for them. In some states, the specific state Medicaid agency must be listed in the trust agreement. For most states, however, it is sufficient to give a generic reference to the state in the payback provision. After any government agencies are repaid for benefits received, any remaining trust assets is distributed to residuary beneficiaries.
A typical client that may benefit from a d4A trust would be one that has assets to preserve while still desiring to qualify for benefits. Maybe this client won an award or settlement and was already on public benefits and would like to remain on those benefits. Maybe this client was the recipient of inheritance and doesn’t want their new found wealth to disqualify them from benefits.
A subset of the d4A trust is one with a Medicare Set-Aside (MSA) sub-trust. This MSA is oftentimes required when there is a personal injury or worker’s compensation settlement. Medicare has an interest in preserving a certain amount of the proceeds of the settlement so they aren’t dissipated while Medicare is left paying for future medical expenses. So, a requirement of the settlement agreement may be to set aside a certain amount of the funds for future medical bills that Medicare would otherwise be forced to cover.
THIRD-PARTY SPECIAL NEEDS TRUST
A third-party trust special needs trust, also known as a supplemental needs trust, is a trust funded by assets that belong to someone other than the beneficiary. This type of trust is not specifically authorized by the US Code; there are no age limits for this type of trust to curtail a Medicaid transfer penalty. However, if the beneficiary has the power to revoke, terminate, or sell the trust for their own benefit, then it is a countable resource for Medicaid purposes. Otherwise, it is usually exempt. And because the assets used to fund the trust never belonged to the beneficiary, a payback provision is not required.
A common client scenario for a third-party SNT would be an individual with means who would like to set aside money for the care of a disabled friend or family member. This can be done during the lifetime of the donor or as a part of their estate plan. A typical estate plan usually contains contingent special needs trust provisions that direct the share going to a beneficiary who is on public benefits into a third-party supplemental needs trust.
POOLED TRUSTS
A pooled trust, found in the US Code under 1396p(d)(4)(C), is also known as a d4C trust. It is established and managed by a charity or non-profit organization and is funded by the disabled person, for that individual’s sole benefit. The fundamental idea is that an individual’s trust is a subaccount within a master’s trust, a collection of other individual trusts. The managing entity oversees the collective individual trusts within the pool as a whole. The arrangement minimizes expenses for the individual trusts. This type of trust may need a payback provision, depending upon the particular trust’s joinder agreement and may have age limits, for pre- and post-age 65 transfers, depending upon state law. A typical client may be one with minimal assets to fund into the trust so that a traditional d4A trust would be fiscally unreasonable.
Trusts can be a crucial tool for special needs planning. Knowing which trust would best benefit you or a loved one can be tough to grasp. The rules of law differ with each particular type of trust and within the individual states. Contact our Redlands, CA office at (909) 888-7100 to discuss your special needs trust options today.