What is a Special Needs Trust?

A Special Needs Trust is a type of trust that helps to protect the assets of a person with disabilities. A special needs trust is set up for a person with special needs to supplement any benefits the person with special needs may receive from government programs. These Trusts are frequently referred to as Supplemental Needs Trusts.  Individuals with disabilities often receive governmental assistance and would benefit from having funds in a trust used to maintain their quality of life.  When an individual who receives government benefits receives money directly, whether by gift, inheritance or otherwise, then that individual’s government benefits may be jeopardized. To protect the government benefits, the excess funds can be placed in a Special Needs Trust, and then used to supplement, not replace, public benefits. A Special Needs Trust is a trust tailored to a person with special needs that is designed to manage assets for that person’s benefit without compromising access to important government benefits. 

Call the Law Office of James C. Siebert & Associates, P.C. /Elder Law & Estate Planning Attorneys of Illinois, P.C. at (847)253-7500 today to schedule an appointment with an experienced Special Needs Planning Attorney.   

Why Use a Special Needs Trusts?

Often times, people with disabilities qualify for government assistance such as Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, and subsidized housing. The right to receive these government benefits is generally based upon the amount of assets or income that individual.  While these benefits are a blessing to the disabled individual, because of the limitations on their income or assets they frequently do not have the means to pay for many small things which can greatly increase the quality of their life.  Many people make the mistake of leaving assets to their disabled loved ones directly being unaware that their thoughtfulness can have a negative impact on that love one.  This is problematic because acquiring assets, such as a lump sum of money, can disqualify your loved one for these types of government assistance programs. However, it is possible to provide for these supplemental needs for disabled loved ones without jeopardizing their government benefits through the proper use of a Special Needs Trust.  There are several types of Special Needs Trusts, and with the assistance of your Elder or Special Needs Attorney you can create the appropriate Special Needs Trust for your loved one to ensure that they have every opportunity for a fulfilled and happy life.

What Can A Special Needs Trusts Be Used For?

According to the law, a Special Needs Trust can be used for “supplemental and extra care over and above what the government provides.”  A properly-drafted Special Needs Trust will allow the Trust to provide for the disabled beneficiary’s needs that are not covered by government benefits, which in some cases the Trust will provide for all the beneficiary’s needs because either the beneficiary does not qualify for or need government benefits at that time. A Special Needs Trust can be, and should be, tailored to match those particular needs, likes and dislikes of your loved one.  While a Special Needs Trust should be used to purchase things that government benefits do not provide, it is essential that the Trustee be aware of the impact of any distribution on your loved one’ government benefits. 

What Are The Types of Special Needs Trusts?

There are two types of special needs trusts:

(1) a special needs trust that is funded with the disabled person’s own assets, known as a First Party Pay Back Trust or OBRA ’93 Payback Trust

(2) a special needs trust funded with assets from someone other than the disabled person such as a parent or other family member known as a Third Party Special Needs Trust

Third Party Special Needs Trust

A Third Party Special Needs Trust is a discretionary trust set up and funded with assets from someone other than the disabled person,  such as a parent or other family member,  for the benefit of an individual who has a disability that substantially impairs that individual’s ability to provide for his or her own care. The purpose of this trust is to maximize private resources available to a person with special needs to provide for his or her own care, and also to insure that the disabled person remains qualified, or is able to qualify in the future, for federal, state and local government benefits. This trust is often implemented by parents of a disabled minor or adult child who does not want that child to inherit a substantial amount of money which would disqualify them from government benefits. Funds of the trust are used to supplement the governmental benefits that their disabled child receives. Upon the death of the disabled child the trust funds may be distributed to other beneficiaries.

The trustee of a special needs trust has sole discretion to expend as much of the income or principal of the trust as appropriate for the benefit of the individual’s comforts and needs not provided for by government benefits. No trust income may be used for the ordinary care, comfort and welfare so long as there are sufficient monies available for that purpose from federal, state, and local governmental agencies. Trust assets are to supplement and not substitute. The trustee may not distribute cash to the individual at any time, and the individual may not demand any distribution of funds.  Under current law such trusts are not considered as a resource of the disabled individual when determining qualification for government benefits and are not subject to the claims of the State when the disabled person dies.

OBRA ’93 Payback Trust

There are two types of OBRA ’93 Payback trusts: a Disability Pay Back Trust (known as a “d4a Trust”) and a Pooled Trust (known as a “d4c Trust”).  

The OBRA ’93 Disability Pay Back Trust (“d4a Trust”) is an irrevocable trust containing the assets of a person under age 65 who is disabled as determined by the Social Security Administration. The trust is exempt if it is created for the benefit of the Medicaid client by a parent, grandparent, legal guardian or the court. The trust provides that any amount remaining in the trust will be paid to the Department of Public Aid upon the death of the trust beneficiary. The trust remains exempt after the beneficiary attains age 65, but any additions to the trust after the person reaches age 65 are treated as transfers of assets.

The OBRA ’93 Pooled Trust (“d4c Trust”) is an irrevocable trust containing assets of a person of any age who is disabled under the same criteria as a Disability Pay Back Trust, with the possible exception of the under the age of 65 limitation. Currently there is a conflict among various federal and State jurisdictions in regard to whether the age limitations set forth d4 (a) apply to d4(c) Trusts. In 2012 Illinois adopted the position that the age limitations set forth d4 (a) apply to pooled trusts with certain defined exceptions.  A pooled trust is created and managed by a nonprofit organization; a separate account is maintained for each person, but for management purposes of the trust pooled funds. An account is set up for the client’s benefit by the client (or agent under power of attorney), parent, grandparent, legal guardian or a court. The state is paid back upon the death of the client, and the remainder may go to family.

Both trusts allow for the funds to supplement any state and federal benefits that the client is receiving. No money shall be used for ordinary care, comfort and health, including as a means of illustration, basic food, clothing and shelter, so long as there are sufficient monies available for those purposes from federal, state and local governmental programs, or from private agencies, or a combination thereof. The trustee of these trusts may not distribute assets from the Trust to the client at any time, and neither the client nor the guardian of his person or estate, if any, shall have any right or power to demand distribution from the Trust at any time.

The Trustee must exercise vigilance in discerning special needs, comforts or luxuries suitable for the client which are not provided by local, state or federal government agencies, or from private agencies or any combination thereof, and for the purpose of satisfying such special needs, luxuries or comforts, the Trustee shall use so much of the income and principal of the Trust as it in its sole discretion believes will enhance the quality of the client’s life without disqualifying the client for any state, federal or local benefits or programs then providing for his needs.

What You Need to Know?

Even if a trust is properly established and funded, if the Trustee improperly spends the income or principal of the trust, the public benefits of the beneficiary could be reduced or eliminated. A Trustee should be familiar with investment standards and the expectations for maintaining trust records. The Trustee should be aware of the tax ramifications of distributions made from the trust. A Trustee should be familiar with the types of public benefits available, the actual benefits received by the trust beneficiary and the requirements of the public benefits, such as SSI, SSDI, and Medicaid. The Trustee also should be familiar with other types of assistance for which the beneficiary qualifies, so that the Trustee does not waste trust assets on items that would otherwise be payable by public benefits. The trust assets should be used only to purchase something that cannot be purchased with public benefits and which, if purchased, will not jeopardize the benefits of the beneficiary.

If you believe that you or a loved one could benefit from the use of a Special Needs Trust, the Law Office of James C. Siebert & Associates, P.C. /Elder Law & Estate Planning Attorneys of Illinois, P.C. can work with you to determine if and what type of Special Needs Trust is appropriate.  The Law Office of James C. Siebert & Associates, P.C. /Elder Law & Estate Planning Attorneys of Illinois, P.C can then assist you in the preparation and execution of the appropriate Special Needs Trust as part of your overall Estate Plan so that you can rest assured that your special needs loved one will be protected after you are no longer there to protect them yourself.

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