Special Needs Trusts
– SPECIAL NEEDS/SUPPLEMENTAL NEEDS TRUST
For a child with a developmental or intellectual disability, it is important to be eligible for Medicaid and SSI benefits. Any inheritance would remove eligibility until the amount inherited would be fully spent. Instead, the funds could go into a trust that would not affect eligibility and the trustee could still use the money for the child’s benefit.
COMMON LAW SPECIAL NEEDS TRUST
This is the type of trust most often advised to clients since in the opinion of the author a properly drafted SNT will be a non-countable resource under Medicaid/SSI law. Most clients do not like the idea of a payback to the State after a lifetime of paying taxes and then paying tax upon their death. The restrictions of the other SNT are also a disadvantage. Most Settlors also prefer to name their descendants as the remaindermen. Of course, this is not an option for the personal injury plaintiff or beneficiary of a Will who must rely on a Court created trust (D4A or D4C).
D4A TRUST (FEDERAL STATUTE) 42 U.S.C. 1396P(D)(4)(A) AKA PAYBACK TRUST, SPECIAL NEEDS TRUST
The federal special needs trust statutory exceptions were passed as part of federal legislation making numerous changes to the Medicaid statute. [OBRA 93 (P L 103-66)]. This was the first expression by Congress stating a congressional policy permitting special needs trusts and continuing eligibility for special needs persons. Prior to such time, there was much litigation with common law special needs trust between applicants and the states. Many states opposed such trusts on policy grounds.
General Requirements for the Trust
A D4A trust is a trust containing the assets of a disabled person under 65 which was established for the benefit of such person by a parent, grandparent, legal guardian or a court if the State receives all amounts remaining in the trust upon such person’s death up to the total medical assistance paid on behalf of the person by the State. 42 U.S.C. 1396p(d)(4)(A) & O.A.C. 5101:1-39-271(C)(7)(a). Note that upon attaining age 65 the disabled person may no longer make any contributions to the trust although the trust continues to be a non-countable resource. This type of trust is commonly used in personal injury or other court settlements for plaintiffs who are recipients of Medicaid, SSI or other public benefits. The attorney representing the plaintiff/Medicaid recipient risks malpractice by not advising such client of this trust planning option.
The requirements for this Trust are as follows:
- beneficiary under age 65
- beneficiary who is disabled under Social Security standards
- trust is established by a parent, grandparent, or legal guardian of the beneficiary, or a court
- trust contains a payback clause to reimburse the state for Medicaid benefits paid during the lifetime of the beneficiary (including a provision apportioning payback among different states) ; note that the statute does not require that the state be fully paid from the trust but only that to the extent there are any remaining funds, that the state is the first payee (“amounts remaining in the trust”); the policy of allowing this trust is for the disabled beneficiary to be the sole beneficiary and to actually benefit from distributions during their lifetim
- trust is for the sole benefit of the disabled beneficiary during the lifetime of the beneficiary; if this requirement is not met, a transfer penalty may apply
- The statute is silent on whether the trust must be Irrevocable. The consensus of opinion of practitioners in this area is that the trust must be Irrevocable and not an available resource to the beneficiary applying the general principals of availability and the SNT case law. Even though O.A.C. 5101:1-39-271(C)(7)(a) provides that this trust may be revocable, this is inadvisable since the beneficiary may move to another state which requires the trust to be Irrevocable. The trust can and should include a clause allowing the Court to amend to trust for the purpose of conforming with the relevant statutory authority. Note that the first sentence of 42 U.S.C. 1396p(d)(4) only states that this subsection [i.e., 42 U.S.C. 1396p(d)] does not apply and does not state that the SNT are non-countable resources.
- The statute is also silent on the standard of distribution of income and principal. Again, the trust should be drafted just as one would draft a common law SNT with a purely discretionary trust. The trust can specify types of supplemental uses but this is not necessary and clearly not required by the statute. Note that the administrative rules (O.A.C. 5122-22-01 and O.A.C. 5123:2-18-01) pursuant to O.R.C. 1339.51 defining what are proper distributions for supplemental services are not applicable to the D4A Trust.
D4C TRUST (FEDERAL STATUTE) 42 U.S.C. 1396P(D)(4)(C) AKA POOLED TRUST
- A D4C trust is a trust containing the assets of a disabled individual which is established by a non-profit association. 42 U.S.C. 1396p(d)(4)(C) & O.A.C. 5101:1-39-271(C)(7)(b). The general requirements of this trust are as follows: beneficiary who is disabled under Social Security standards
- trust is established and managed by a non-profit association
- a separate account is set up for each beneficiary
- trust is established by a parent, grandparent, or legal guardian of the beneficiary, or by the individual, or a court
- trust contains a payback clause to reimburse the state for Medicaid benefits paid but only to the extent that funds do not remain in the trust; thus, the non-profit association may retain funds after the death of the individual for the benefit of other disabled individuals without any payback
- trust is for the sole benefit of disabled individuals
This trust is a good option for the client who wishes to benefit other similar persons after the death of their special needs child. For a Court created trust, this may also be a good option if it is difficult to find a trustee for a D4A Trust.
This trust is presently being offered in Dayton by The Dayton Foundation. It is called The Ohio Community Pooled Trust Of The Disability Foundation, Inc. For more information, call (937) 225-9939. In Cleveland, the trust is offered by the Community Fund Management Foundation (CFMF) which uses Fifth Third Bank as the trustee. For this trust, call (216) 736-4540.
O.R.C. 1339.51 SUPPLEMENTAL SERVICES TRUST
- Legislative History This special needs trust was first enacted with an effective date of 4/16/93 by the Ohio Legislature prior to the enactment of the above federal special needs trusts [42 U.S.C. 1396p(d)(4)] on 8/11/93. This trust is now redundant given the D4A trust above and contains more restrictive and specific requirements. It is also arguably not in compliance with the federal Medicaid provisions and thus an impermissible part of the Ohio Medicaid plan. The States are not free to adopt their own resource rules unless there is some federal authority permitting a State option or variance. The statute even acknowledges this restriction [“To the extent permitted by federal law..” O.R.C. 1339.51(D)]
- O.R.C. 1339.51 provides an additional safe harbor for a disability trust. The requirements for this include: 1. beneficiary must be eligible for services through the Department of Mental Retardation and Developmental Disabilities or through the Department of Mental Health or Board of Alcohol & Drug Addiction 2. maximum amount permitted upon initial funding is $236,000 (2013 amount) 3. upon the death of the beneficiary at least 50% of the remaining assets go to a special fund created for the benefit of disabled individuals under the O.R.C. OAC 5101:1-39-271(C)(7)(d). 4. trust can only provide for “supplemental services” as defined in O.A.C. 5122-22-01 or O.A.C. 5123:2-18-01 5. beneficiary has no authority to compel distributions for basic support or to make any other payments This trust is of course restricted to those beneficiaries that have the type of disabilities specified above. The definition of supplemental services is also much narrower than the permitted distributions under the other SNT alternatives.
COMPARISON OF SNT ALTERNATIVES
The Settlor creating the Trust must be advised of all the SNT alternatives and make the appropriate choice according to his/her intention. A Court, acting in loco parentis, must go through the same thought process and decide how to draft a trust to comport with the policy of providing a supplemental source of funds to improve the quality and enjoyment of life of the beneficiary. The following comments reflect this author’s experience counseling clients on this choice.
- Common Law SNT This is the type of trust most often advised to clients since in the opinion of the author a properly drafted SNT will be a non-countable resource under Medicaid/SSI law. Most clients do not like the idea of a payback to the State after a lifetime of paying taxes and then paying tax upon their death. The restrictions of the other SNT are also a disadvantage. Most Settlors also prefer to name their descendants as the remaindermen. Of course, this is not an option for the personal injury plaintiff or beneficiary of a Will who must rely on a Court created trust (D4A or D4C).
- D4A Trust This trust is most commonly used by personal injury plaintiffs or estate beneficiaries. The trust can be tailored to the particular needs and desires of a beneficiary unlike the D4C Trust which is a master trust document applicable to all beneficiaries. The D4C could also be used for a personal injury plaintiff but the funds in a D4C will ultimately remain with the non-profit which most persons would not choose. However, finding a good trustee for smaller amounts is often a problem with the D4A Trust. An obvious advantage of this trust is that it is a statutory safe harbor with less risk of litigation.
- D4C Trust A Settlor who has some charitable intent and is not concerned with designating remaindermen who are siblings or their descendants will often choose the pooled trust. A person contemplating a D4A Trust but who cannot find a trustee may also opt for the pooled trust. The D4C trust may not provide for the specific desired distributions for a particular beneficiary since the master trust form cannot be changed to provide for different distributions to different beneficiaries of the pooled trust. The trust language should be reviewed to determine if it will provide for appropriate distributions for the child. This statutory safe harbor also has less risk of litigation.
- O.R.C. 1339.51 Supplemental Services Trust This trust is limited to a beneficiary eligible for services MRDD or DMH and contains so many restrictions that it is not desirable for most clients. The D4A Trust is much broader and more flexible and it is hard to imagine that a grantor comparing the two alternatives would find O.R.C. 1339.51 a better choice. This statutory safe harbor also has less risk of litigation.
A special needs person might also consider opening an ABLE account in Ohio referred to as a STABLE account. The beneficiary establishing the account must meet the following requirements: 1)receiving or is otherwise eligible for Social Security disability benefits ; 2) and based on a disability which occurred before the date on which the individual attained age 26.
The total annual contributions permitted to an ABLE account are limited to $17,000 (2023 amount). There is also a limit on the total lifetime contributions. The funds in an ABLE account are not countable resources for purposes of determining eligibility for SSI and Medicaid. Upon the death of the beneficiary the state Medicaid plan may file a claim against the account. Withdrawals from the account must be used only to pay for qualified disability expenses.
Disadvantages of ABLE accounts:
- not all special needs persons qualify (under 26 req.)
- dollar limitations on annual and total amounts
- not appropriate for a large lump sum receipt (PI settlement or inheritance)
- lack of flexibility governing the use of the funds
- Medicaid payback