Viewpoints on Financial Planning
According to the 2010 U.S. Census data, nearly 36 million Americans live with a disability or 11.9 percent of the population. Whether it is a hearing, vision, or cognitive special needs, the financial and emotional costs to a family are considerable. Special needs children present an even greater concern for their parents, since the importance of a child’s care and comfort exists even after the parents have passed away.
With advances in medicines and medical procedures, many disabilities which once shortened life expectancy are now more effectively managed. Of course, an adult or child with special needs may qualify for federal and/or state benefit programs such as Medicaid, Medicare, Supplemental Security Income (SSI), and Social Security Disability (SSD). In many respects, these programs fall woefully short of providing a comfortable lifestyle for the recipient. Some government programs are “means-based,” making it difficult for a parent to supplement their child’s income while not jeopardizing their qualification for government benefits. One possible solution is a special needs trust (SNT). Despite the changes to special needs planning as a result of the Patient Protection and Affordable Care Act which will begin in earnest in 2014, the following article will broadly cover the issues of government benefits and the importance of creating a special needs trust.
FREQUENTLY ASKED QUESTIONS
1. What is Medicaid?
Medicaid programs are a cooperative federal and state insurance program established under the Social Security Act. This federal law empowers the 50 states to establish Medicaid programs which provide medical assistance to low income individuals and families, including those people age 65 or over, blind, disabled, or members of families with dependent children or qualified pregnant women or children. States, operating within the broadly written federal law, each decide eligibility criteria, eligible coverage groups, services covered, administrative and operating procedures, and payment levels.
Medicaid should not be confused with Medicare, a federally administered social insurance program for the elderly, younger people with disabilities, and people with end stage renal disease. Medicaid is a “means-based” government benefit where the applicant’s low income and financial resources determine eligibility. Medicaid is typically administered by a state’s human services department in cooperation with county social services departments.
With the rise in long-term healthcare and medical care, Medicaid is growing more and more important to low income elderly and special needs persons. It covers long-term nursing care and many home health services. However, Medicaid programs do not have the funding to meet the increasing demands of an aging American population.
2. From state to state are Medicaid eligibility rules the same?
No. Medicaid eligibility rules differ from state to state. An applicant’s residency determines which state eligibility rules will apply. For example, Georgia’s Medicaid qualification rules apply only to Georgia residents. Residency determines where the Medicaid assistance application is filed. Residency is normally the applicant’s county of domicile prior to entering a nursing facility or adult care home. In most states, residency verification is a stringent process; therefore, applicants must have proof of residency before applying for benefits.
The Department of Social Services in the applicable county determines Medicaid eligibility. The Social Security Administration decides qualification for Supplemental Security Income (SSI) benefits.
3. How is an applicant’s income and resources determined under the Supplemental Security Income (SSI) program?
The Supplemental Security Income program (and, by extension, Medicaid) has severe limits on the recipient’s income and ownership of assets. The basic purpose of the SSI program is to ensure a minimum level of income to people aged 65 or older, blind or disabled, who have limited income and resources. The law provides that payments can be made only to people who have income and resources below specified amounts. The applicant’s income and resources are called “available resources.” Therefore, the amount of available resources an applicant has is a major factor in deciding whether 1) the applicant can receive SSI benefits, and 2) in computing the government benefit dollar amount.
4. May an applicant receiving Supplemental Security Income (SSI) or Social Security Disability (SSD) benefits also receive Medicaid coverage?
Yes. The process is different, however, depending upon which governmental or public benefits an applicant is already receiving. By and large, recipients of Supplemental Security Income (SSI) automatically receive Medicaid and do not need to apply separately at the county Medicaid agency. Individuals approved for SSD benefits, but not SSI, must apply separately for Medicaid assistance.
5. May a Supplemental Security Income (SSI) or Medicaid benefits recipient receive supplemental assistance from other financial sources without jeopardizing benefits?
Yes. With careful planning, a government benefits recipient may receive additional financial assistance through very limited gifts from parents, friends or relative, or a specially designed trust called a Special Needs Trust (hereinafter, a “SNT”).
6. What is a Special Needs Trust (SNT)?
A SNT is a type of trust designed to protect a special needs beneficiary from becoming disqualified to receive “means -based” government benefits. As mentioned above, the two primary “means -based” benefits are: Medicaid and Supplemental Security Income. In many states, but not all, SSI automatically comes with Medicaid benefits. The SNT allows the trustee to only make non-countable income distributions for extra items or services the beneficiary does not receive from the government.
Some examples of permissible SNT distributions are: hobbies and vacations, limited recreational and vocational activities, professional services, maintenance of a pet or service animal, or educational opportunities. The state-level rules concerning permissible (or non-countable) SNT distributions varies from state to state; hence, detailed guidance from an attorney or benefits specialist is recommended.
7. How are benefits obtained from a Special Needs Trust?
A SNT is specifically drafted in a way to hold assets of any amount for the special needs individual’s well being while allowing the beneficiary to qualify for the government’s “means -based” programs. A SNT may be created either during one’s lifetime (i.e., interviews) or after death (i.e., testamentary). The SNT may also be either self-settled (i.e., established by the beneficiary with the help of a court, their parent or legal guardian) or a third-party (i.e., created by the parent or relative of the beneficiary).
Attorneys design SNTs to provide the trustee with substantial discretion to decide if, when, and how to distribute trust income and/or principal for the benefit of the special needs trust beneficiary. The trust beneficiary, therefore, will not have open access to trust property and, furthermore, cannot force the trustee to make a distribution. Unlike most conventional irrevocable trusts, a properly drafted SNT will not contain provisions requiring the trustee to make mandatory distributions for health, education, support or maintenance.
These three features legally separate ownership of the trust assets from the beneficiary. So, when a beneficiary of a SNT applies for government benefits, the officials will rightfully determine if the beneficiary’s financial resources are low enough to qualify. The separation of ownership features built into the SNT prevents the trust assets from being counted as an “available resource,” which may have otherwise caused disqualification. Therefore, a SNT provides for the “special needs” beyond the basic needs for medical care, food and shelter, and enhances the beneficiary’s overall lifestyle.
8. Are there different types of Special Needs Trusts?
Yes, a special needs trust (SNT) can be a first party (self-settled), third party or a pooled trust. A third party SNT is created by a donor who would like to set aside or bequeath assets for the benefit of another individual without jeopardizing the individual’s eligibility for government benefits. It can be created either during life or after death. It is most frequently utilized when a parent wants to establish and fund a trust for a special needs minor or adult child.
Moreover, this may also arise when the spouse of a Medicaid recipient, or potential Medicaid recipient, wishes to leave after death some or all of their estate in a trust for the benefit of the recipient spouse. Another rationale for a third party SNT is where a donor wishes to remove assets from his or her estate in order to either reduce or eliminate transfer taxes.
A SNT may be a self-settled trust (first party) established by the government benefits recipient. In plain words, a SNT may be created by a special needs individual, funded with the special needs individual’s own funds, and designed to benefit the special needs individual only. This occurs most frequently when there is a lawsuit recovery or settlement, such as for personal injury. Beneficiary-funded trusts are effective in providing additional care for individuals whose trusts are created before age 65. Upon the beneficiary’s death, however, the agency providing Medicaid must be reimbursed from remaining trust assets for care provided during the existence of the trust (not necessarily reimbursed for care provided during the beneficiary’s entire lifetime).
Finally, some states permit a variety of special needs trust called a “pooled trust.” This type of arrangement is maintained by a non-profit charitable organization and is ideally suited for smaller trusts.
9. Who needs a Special Needs Trust?
The following list is obviously not all inclusive:
- A special needs individual who needs assistance with managing their financial affairs and relies on governmental assistance to provide for their basic needs;
- Those people who are unable to work or obtain private health insurance as a result of their disabilities;
- Family members who want to maintain eligibility for governmental benefits and maximize the future security for their special needs family member;
- A person who is “blind” as defined by federal law as central visual acuity of 20/200 or less in the better eye with the use of a correcting lens; or
- Any other person over 18 years of age with a “disability” as defined by the Social Security Act, such as hearing or cognitive impairment.
10. Who should be trustee of the Special Needs Trust?
The choices vary depending upon several factors, such as size of the trust, the beneficiary’s age or marital status, the personal preferences of the beneficiary or his/her family. Corporate fiduciaries and other professional fiduciaries are an option depending on the size of the trust and the potential trustee’s fee schedule. Special needs trusts (SNTs) require more unexpected distributions and communication with the beneficiary than other trust types. The trustee must not only talk to the beneficiary, but family members, lawyers, physicians, professional care providers and governmental agencies, too.
Knowledge of federal/state entitlement pro-grams and their governing laws is a must. The SNT trustee must understand the following programs: Supplemental Security Income (SSI), Medicaid, Medicare, Food Stamps, and Section 8 subsidized housing. These programs are sometimes so complex that, where necessary, the trustee should be willing to reach out to skilled professionals to navigate through the most difficult issues.
In the final analysis, SNT trustees, their advisors, people with disabilities and their families should seek out a knowledgeable and unified team whose goal is to utilize government benefits to the fullest before accessing a beneficiary’s trust funds.
11. Who should not be the trustee of a Special Needs Trust?
There are certain persons who should not be named trustees. While many beneficiaries would like to be the trustee themselves, the trustee’s power to make distributions to him or herself as beneficiary would render the assets of the trust an “available resource” for the purposes of government benefit program qualification. Any person with a legal obligation to support the beneficiary, such as a parent of a minor child or a spouse, should not be trustee unless their distribution powers are limited in a fashion to avoid adverse income tax consequences or jeopardize the beneficiary’s qualification for governmental assistance.
Due to cost, employing a professional fiduciary is sometimes not a practical option. Using family trustees may be the most economical and practical solution. Acquiring specialized fiduciary training on dealing with government benefit agencies is difficult, if not expensive. Needless to say, untrained SNT fiduciaries, like siblings or parents, ought to have a circle of professional advisors close at hand to help in the trust administration.
12. Is an attorney always necessary for SNT planning?
Yes. An attorney who specializes in special needs planning can help special needs people and/or their parents properly plan their estates. With the passage of the Patient Protection and Affordable Care Act, planning for special needs individuals has become more complex and more options may be available.
After 2013, many of the new healthcare options will be launched and more choices may be available to both special needs individuals and parents of a special needs child. Therefore, an attorney with expertise in special needs planning and government benefits is a must. Clearly, relevant Social Security/Medicaid laws, federal/state regulations and planning options are forever changing and require unending vigilance. A qualified attorney can help parents of a special needs individual weigh advantages and disadvantages of various special needs planning tools and techniques, and ultimately assist the family make an informed decision.
The first step in special needs planning is obtaining proper advice and counsel. Special needs individuals and their families are no longer confined to limited planning options. National healthcare laws are greatly impacting traditional notions of special needs planning. Today, attorneys and financial planning professionals are more keenly aware of the various special needs planning options available to a government benefits recipient. These options may both enhance a benefits recipient’s lifestyle and preserve their government benefit eligibility.
It is critical to have the proper professional team working together to keep abreast of government benefit laws, file tax returns, manage the trust investments, update financial plans, hire/fire care managers, and oversee the beneficiary’s healthcare. With proper planning, professional advice, and teamwork, a person with special needs can have a more fulfilling, healthier and enjoyable life.