Elder Law

: Law Office of Donald D. Vanarelli Blog

Planning for Disabled Children and Adults: Special Needs Trusts and Supplemental Benefits Trusts

By dvanar (index)

As discussed below, a self-settled special needs trust is a device used to protect funds belonging to a disabled person resulting from, for example, a tort action. An estate planning tool with similar features but important differences may be used to protect a disabled child?s inheritance from a parent: the testamentary supplemental benefits trust.

Special Needs Trusts

A common method of protecting the funds belonging to a disabled person from, for example, a tort action, or gifts made to the disabled person prior to the establishment of the trust, is the creation and funding of a ?self-settled special needs trust.? By placing the funds in a special needs trust, those assets will be preserved, while the disabled person?s eligibility for Medicaid, Supplemental Security Income (?SSI?) or other needs-based public benefits will be protected. The creation of a special needs trust is authorized by the 1993 Omnibus Budget Reconciliation Act (?OBRA?), 42 U.S.C. §1396p(d)(4)(A). That law recognizes the use of special needs trusts to ensure that assets of a disabled individual are not exploited or wasted, and to preserve that disabled individual?s eligibility for Medicaid and other needs-based public benefits.

Pursuant to 42 U.S.C. 1396p(d)(4)(a), an individual may remain eligible for such benefits under the ?Payback Trust? provision if he or she has:

A trust containing the assets of an individual under age 65 who is disabled ? and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter. Id. (emphasis supplied).

On June 5, 1996, in a HCFA Memorandum entitled ?Treating Disability Trusts under Transfer of Assets, Trust Estate Recovery, and Third Party Liability Rules,? HCFA confirmed to all state Medicaid directors that special needs trusts, including those established by a court on behalf of or at the behest of an individual, are covered by the Medicaid trust rules, including the provisions exempting a trust from the general rules that cause the trust to be considered as available resources.  See also Waldman v. Candia, 317 N.J. Super. 464 (App. Div. 1999).

Pursuant to N.J.S.A. 3B:11-36 et seq., and N.J.A.C. 10:71-4.11 (g)(1)(i-xviii), a special needs trust may be established if the following criteria, inter alia, are met:

1. The trust is irrevocable.
2. The trust is established for a person under 65 years of age.
3. The individual for whom the trust is established is disabled within the definition of 42 U.S.C. 1382c(a)(3).
4. The trust is established by a parent, grandparent, legal guardian of the individual, or a court.
5. The purpose of the trust is to use the trust assets to supplement, rather than supplant, public benefits.
6. The trust contains a provision that, upon the death of the beneficiary, any state which has provided medical payments under its Medicaid program for the disabled individual is entitled to be reimbursed from the remaining assets of the trust.
7. The trust states that the trustee shall fully comply with all State laws, including the Prudent Investor Act.   Id. (emphasis supplied).

Supplemental Benefits Trusts

Unlike a self-settled special needs trust, a supplemental benefits trust is funded by a third party (for example, a parent) with the parent?s assets (such as the parent?s testamentary disposition to the disabled child). This difference in the source of funding is the rationale for the most important distinction between a special needs trust and a supplemental benefits trust: the ?payback provision.?

Pursuant to N.J.S.A. 3B:11-36 et seq., and N.J.A.C. 10:71-4.11 (g)(1)(i-xviii), a special needs trust must include a provision that, upon the death of the beneficiary, any state which has provided medical payments under its Medicaid program for the disabled individual is entitled to be reimbursed from the remaining assets of the trust. This payback provision is not a requirement of a supplemental benefits trust. The result is that, upon the disabled child?s death, the balance remaining in a supplemental benefits trust may be distributed to other family member(s), rather than to the State.

Full post as published by Law Office of Donald D. Vanarelli Blog on May 05, 2009 (boomark / email).