Special Needs Trusts are often created with funds received from legal settlements or inheritances. Special Needs Trusts are important documents when established for people who are receiving government benefits. However, as practitioners we must remember that a Special Needs Trust must not only be effectively drafted for those receiving public benefits, the trustee must also make distributions in accordance with the guidelines of the trust so as not to risk loss of Supplemental Security Income (SSI) or Medicaid benefits for the beneficiary.
The first place a trustee should look when making a distribution from an SNT is the four corners of the document. Even though the state code may allow a distribution, if the trust instrument itself does not, the trustee must abide by the language of the trust. For example, most states will allow SNT funds to be used to pay for vacations, but if the trust instrument itself states it is not to be used for “travel expenses,” the trustee is now limited beyond what the state code might allow. However, once the trustee is familiar with the limitations of the trust document, he should look to the state code and what programs the beneficiary is on for any other limitations on disbursement.
Special Needs Trust payments are designed for “supplemental” or luxury needs not provided for by government benefits. SNT funds are not intended to be used for basic shelter or food, as those needs are provided for by the government benefits. Any money from the trust spent on food or shelter on a regular basis, or given directly to the beneficiary, can count as income for government benefit purposes.
If a beneficiary is receiving SSI benefits, the trustee should be cautious not to make payments directly to the beneficiary, payments to restaurants or grocery stores, mortgage or rent payments, or tax payments on the home. Some jurisdictions also frown on disbursements to basic utility companies, stating that those payments are covered by the SSI payment. Most of these types of payments will result in a 1/3 loss of SSI income. So, while they are discouraged disbursements, there may be some cases in which the trustee determines that the benefit of making the payment outweighs the loss of SSI income. For example, if the beneficiary is unable to pay the tax notice on his home, the trustee may decide to pay the taxes and let that money count as income for the beneficiary the month it was paid. In this scenario, the loss of the 1/3 income is far outweighed by keeping the home taxes up to date, assuring that the beneficiary has a place to live.
When institutionalized clients come to us with a Special Needs Trust, we must be cautious with distributions as well. However, there are plenty of supplemental needs the money can pay for. Nursing home patients can use the money in an SNT to pay the additional fee for a private room, a television, eye glasses and tooth care not provided for by Medicaid, the travel expenses and mileage of the sponsor to come and check on the patient, and caregiver expenses. Oftentimes, nursing homes are happy to hear that a patient has a Special Needs Trust to pay for additional expenses that arise, and some homes will look more favorably upon Medicaid and Medicaid-pending patients who have such funds to “supplement” care costs.
The LWPCCS software allows us to create both first-party and third-party Special Needs Trusts that conform with the federal and state requirements and allow the greatest discretion possible to your trustees. It is, of course, important that the trustee understand what distributions he can make and that he contacts an attorney with disbursements he is unsure of. This type of trustee guidance is a great opportunity for us to provide our clients with our understanding and counsel through a maintenance plan.
If you are interested in seeing our estate planning drafting software first hand, just click here and schedule your live complementary demo.
Kimberly M. Brannon, Esq., Legal-Technical and Software Trainer