How Can a Special Needs Trust Help a Family Facing Disability Issues?

By Heather Durham Nadler

Editor’s Note: The following is an excerpt from Ms. Nadler’s recent presentation at “Current Financial Topics in Family Law.” For a complete copy of the article, “Special Needs Trusts, Elder Care and Disability In the Arena of Family Law,” please contact the author at heather@heathernadlerlaw.com or the DBA newsletter editor at jreece@hhcmfamilylaw.com.

Going through a divorce can undoubtedly be one of the most traumatic experiences one faces in a lifetime and divorce unfortunately touches, either directly or indirectly, the vast majority of today’s families. When an individual with a disability is involved, whether that individual is one of the parties to the divorce proceeding or is the child of the parties, the trauma can become even greater.

When facing a divorce, parents with disabilities can be left worrying how they will provide for their children. Spouses with disabilities are fearful of how and if they will ever be able to become self-supporting. Parents are left with confusion as to how to view the funds of a child with a disability when determining support obligations.

A Special Needs Trust (SNT) can be a valuable tool in assisting special needs families who are facing a divorce.

Special Needs Trusts are the result of the need to provide for individuals with disabilities who cannot provide for themselves. Individuals with disabilities, who by definition cannot work sufficiently to support themselves, often have limited financial resources and may be dependent upon a spouse and/or government benefit programs for their basic needs. But these individuals have financial needs beyond basic food, shelter, and medical care. Public benefit programs are not designed to provide and maintain quality of life for its beneficiaries. For example, these programs don’t pay for transportation, recreation, entertainment, special therapies, equipment, and comfort items.

Where there is a child with disabilities in a divorcing family, the manner in which child support is structured will also impact that child’s eligibility for public benefits. This is especially true where support will continue beyond the age of majority. Accordingly, the use of a Special Needs Trust may be appropriate.

Special Needs Trust Basics

A Special Needs Trust (SNT) is a tool for allowing individuals with disabilities to establish and maintain their quality of life without compromising their eligibility for public benefits. The purpose of an SNT is to insure that the beneficiary maintains his eligibility for public benefits to pay for basic needs – food, shelter, and medical care – while providing a reserve fund for the beneficiary’s supplemental and quality of life needs.

Special Needs Trust Requirements

All SNTs must meet certain requirements. For example, the beneficiary must be disabled (as defined by the Social Security Act); must not be able to revoke the trust (if the beneficiary could revoke the trust, the trust funds would necessarily be available to the beneficiary); must not be able to direct the use of the trust assets for his own support; and cannot be the trustee.

Self-Settled Special Needs Trusts

Generally, when an individual makes a transfer of his assets for less than fair consideration, a transfer penalty is imposed and the individual will not be eligible for SSI or Medicaid benefits for a period of time. Funding a self-settled Special Needs Trust is an exception to this transfer penalty rule. 42 U.S.C. ‘1396p (d)(4)(A) and (c).

A self-settled Special Needs Trust is funded with assets that belong to the individual with the disability, typically found money such as the proceeds of litigation, an inheritance, lottery winnings, a divorce settlement, or the sale of real property.

A stand-alone SNT (42 U.S.C. ‘1396p (d)(4)(A)) drafted specifically for this beneficiary must be established by a parent, grandparent, court, or legal guardian, and funded with assets of an individual who is less than 65 years of age. So, while the assets used to fund the self-settled SNT belong to the individual with a disability, that individual cannot establish the trust himself.

The other option is to establish an account with a pooled SNT entity (42 U.S.C. ‘1396p (d)(4)(c)) such as the Georgia Community Trust. For Georgia Medicaid purposes this account can be funded with assets of an individual who is fewer than 65 years of age and can be established by a parent, grandparent, court, or legal guardian, or by the beneficiary himself (if he is competent to do so) or by the beneficiary’s agent on his behalf. Until May 1, 2006, a pooled SNT could be funded with the assets of an individual of any age. However it is now the policy of the Georgia Department of Community Health that federal law only permits the funding of pooled SNT accounts by individuals who are less than 65 years of age. Accordingly, the Georgia Community Trust is no longer permitting the establishment of accounts for beneficiaries who are 65 or older.

At the death of the beneficiary any assets remaining in the stand-alone SNT must be used first to reimburse the state Department of Community Health (DCH) for medical assistance paid on the beneficiary’s behalf. If the assets are held in a pooled SNT then the individual can elect either to reimburse the DCH or to direct remaining assets to a successor trust for the benefit of other individuals with disabilities.

Third-Party Special Needs Trusts

A third-party Special Needs Trust is funded with assets that belong to someone other than the individual with the disability. This may include gifts made to the SNT for the benefit of a child during the parent’s lifetime (an inter-vivos SNT) or money left in an SNT under a parent’s Will (a testamentary SNT). The SNT can be established at any time regardless of the age of the beneficiary. It may be established by anyone other than the beneficiary.

The Trust can be a stand-alone SNT drafted specifically for this beneficiary, or can be held in a pooled SNT such as the Georgia Community Trust.

At the death of the beneficiary any assets remaining in the third-party SNT can be distributed to remainder beneficiaries the settlor has selected. Because the SNT was funded with third-party funds there is no requirement that Medicaid be paid back.

Conclusion

SNTs can be a valuable tool for clients, but it is often important to associate a competent attorney educated in SNTs because a professional who is knowledgeable with regard to available public benefits and who is comfortable working with individuals with disabilities can be an even more valuable tool to guide the family through a traumatic process such as a divorce.