UNIQUE CONSIDERATIONS FOR INDIVIDUALS WITH SPECIAL NEEDS

The Special Needs Trust or Supplemental Needs Trust (“SNT”) is a form of discretionary spendthrift trust designed to protect a disabled beneficiary’s government benefits while providing a supplemental fund to provide services and programs not otherwise provided by programs such as Supplemental Security Income (SSI) and Medicaid, Medi-Cal in California. Individuals with disabilities are eligible for two distinct governmental programs: 

1. Social Security Disability Insurance (SSDI) This is an entitlement program for individuals who become disabled and have paid into the social security system. In order to qualify for this program, the individual must prove that he/she has a disabling condition which prevents him/her from obtaining substantial gainful employment. As long as the individual continues to qualify as a disabled individual and does not return to work, money received from inheritances, gifts or unearned income will not affect continued eligibility. 

2. Supplemental Security Income (SSI) To become eligible for SSI, an individual must be Elderly (over age 65), Blind or Disabled and have little or no resources or income.[1] SSI provides the necessities of life such as food, clothing and shelter. This program is known as a needs-based program. Currently the federal government pays individuals in this category $500.00 a month and the State of California provides a supplemental amount which when added together, usually provides a maximum payment of around $690.00 per month. These amounts are indexed annually for inflation and cost of living increases. 

    (a) Categorically linked Medi-Cal. For many disabled and elderly, SSI is a crucial link to health insurance. For these individuals who have never been able to obtain employment because of a disability and therefore would not qualify for Medicare, obtaining SSI means that the costs of health care will be provided by the State through the Medi-Cal program. For families with disabled children who are unable to obtain private health care coverage, this program offers the only opportunity for lifetime health care. 

    (b) Income Limits “Income” is defined in general as payments a person receives either in cash or cash equivalent (in kind income) that can be used to meet the person’s needs for food, clothing, or shelter. [2] For the year 1998, an individual who is aged, blind or disabled may have earned income annually of $5,928 and a married couple is entitled to $8,892. 

Example: Amy is an SSI recipient. Her brother pays her rent each month. Amy’s SSI payments will therefore be reduced by one-third. However, if Brian pays Amy’s telephone bill, her benefits will not be reduced while payment of electrical or gas bills will also constitute support by a third party. 

Unearned Income which is also counted in determining income limits includes: Annuities Pensions Alimony and Support Dividends Gifts or Inheritances Gifts or payments that can not be used as food, clothing or shelter are not considered income. For example, if Martha’s son pays for her prescriptions each month, this is not considered a payment towards food, clothing or shelter and will not affect Martha’s SSI benefits. 

    (c) Resource Limits In addition to meeting the income limits, SSI applicants must also meet the SSI resource test. For an individual the resource limit is $2,000 and for a married couple when both are applying for benefits the resource limit is $3,000. Resources are cash or other liquid assets or any real or personal property that an individual owns and could convert to cash to be used for support and maintenance.[3] If the individual has the right, authority, or power to liquidate the property, the property is considered to be owned by the individual and is included in the individual’s resource calculation.[4] As further defined by regulation, if a non cash item, such as promissory notes, bonds, mutual funds, joint ownership interests, can be converted into cash within 20 days, then these assets are considered countable resources.[5] 

Basically, the individual who is eligible for SSI and Medi-Cal will virtually be someone who is impoverished . NOTE: On December 14, 1999, President Clinton signed into law the HR 3443, The Foster Care Independence Act. This legislation now imposes a penalty on recipients of Supplemental Security Income (SSI) who transfer “resources” for less than fair market value or adequate consideration. New rules applicable to the transfer of resources to a Trust are effective as of January 1, 2000. Transfers to Special Needs Trusts are exempt from the transfer penalty rules. The new legislation now imposes a penalty of up to 36 months after the transfer of a “resource”. The distinction between a resource and income is critical. Income is defined by statute, 42 U.S.C. § 1382a(a).

The definition includes wages, rents, dividends, an inheritance and awards (42 U.S.C. § 1396a(a)(2)(D)). It appears that the language of HR 3443 maintains the prior definition of “income”. However, some SSI and Medi-Cal eligibility workers are treating lump sum payments in the month of receipt as a resource. Estate planning for our disabled and elderly clients who receive a personal injury award or an inheritance should be undertaken with great care and advice regarding the transfer of assets should be done with caution.

II. PRESERVING GOVERNMENT BENEFITS: THE SPECIAL NEEDS TRUST 

A. The Special Needs Trust (“SNT”) as part of the Living Revocable Trust or Will. This author drafts numerous SNTs as part of the estate planning for families with special needs children. In the typical scenario, husband and wife create a Living Trust during their lifetime. Upon the death of the first spouse, a Bypass Trust and a Survivor’s Trust are created. At the death of the surviving spouse, the Bypass Trust and Survivor’s Trust will be distributed outright to the children. Exception: The share that is created for the disabled child will be held in a SNT to supplement government benefits and in no case, will the Trustee be permitted to supplement the beneficiary’s support and maintenance. Accordingly, the typical discretionary trust language that permits the Trustee to distribute income and principal based on an ascertainable standard for health, maintenance, support and education, will cause the beneficiary to lose his/her governmental benefits. 

According to the Program Operation Manual, (“POMS)”, “Trusts as Resources”, which is published by the Social Security Administration,, “.. if an individual can direct the use of the trust principal for her/her support and maintenance under the terms of the trust, the trust principal is a resource for SSI purposes.”[6] In determining the amount of money that should be set aside for the special needs child and held in a SNT, it is important to note that Social Security looks to the needs of the disabled beneficiary and what is reasonably necessary to meet the individual’s special needs. Therefore, the author, in an attempt to help families provide for a special needs child, often adds sprinkling language to the SNT which permits the Trustee to sprinkle income and principal among the disabled beneficiary and other siblings during the lifetime of the beneficiary. In so doing, on could argue to the Social Security Administration that the SNT funds are not solely for the benefit of the disabled individual and therefore the amount in the trust is not unreasonable or excessive. One advantage of creating the SNT under a Living Trust or Will, is that the provisions can be amended to meet the changing needs of the disabled individual and the changed financial circumstances of parents and/or siblings. 

B. The Letter of Intent As part of creating a SNT for a disabled child, this author advises parents to create a letter of intent advising the Trustee of the life style which should be provided for the disabled beneficiary. It is the greatest fear of parents with disabled children that upon their death, there will be no one to sufficiently manage the care of a disabled son or daughter. Through the letter of intent, parents can plan for the care and comfort of a child above and beyond the necessities of life. This may include having the Trust purchase a home or condominium for the special needs beneficiary, planning vacations, paying for treatments and therapies not otherwise covered by governmental programs and making sure that there are case managers that regularly supervise the disabled individual’s living situation. The letter of intent helps parents plan for the future of their child knowing that the Trustee will have a road map to guide him/her in making the SNT work effectively, and insuring that the child’s special needs are met. 

C. The Trust Advisory Committee Often parents chose corporate fiduciaries as Trustees of the SNT. Recently, the author’s clients have begun choosing their Certified Public Account to serve as Trustee knowing that this individual will not only manage the money competently, but will prepare the necessary fiduciary returns required of an irrevocable trust. However, a corporate fiduciary or CPA may not be well versed on the public benefit programs and how distributions from the SNT might affect continued eligibility. Therefore, the use of a Trust Advisory Committee (TAC) comprised of family members, and/or social workers and advocates shifts the responsibility for determining what trust distributions should be made, to whom and under what circumstances to those individuals who are in a better position to understand the disabled beneficiary’s needs as well as being knowledgeable in government benefit programs. 

III. The Role of the Trustee in Administering The Special Needs Trust

A. The goal in administering the SNT is to protect the beneficiary’s government benefits. In addition, the Trustee, usually pursuant to the terms of the Trust, must insure that the beneficiary is receiving all governmental benefits to which he/she is entitled. The POMS regulations warn that trust distributions are income to the beneficiary if paid to him or her in cash, and may result in “in kind income” to the beneficiary if used to pay third party vendors on his or her behalf.[7] Therefore, the main goal of the Trustee is to satisfy these rules and provide optimal benefits to the beneficiary. 

B. In-Kind Support and Maintenance. Problems for the trust beneficiary arise when in-kind income consists of food, clothing or shelter. The rational behind this theory is that SSI benefits are specifically intended to pay for a person’s food, clothing, and shelter. If the SNT beneficiary receives support from a third party, including the SNT, for these necessities of life, then he/she will be determined to be receiving in-kind support and maintenance. This is why the typical discretionary spendthrift trust will not suffice to protect government benefits. As noted earlier, trustees of these discretionary trusts are given the right to disburse income and principal for support and maintenance, the very items that must be avoided in order to protect the disabled beneficiaries government benefits. If the Trustee of the SNT provides in-kind support and maintenance, the need for SSI will be reduced. There are several ways in which the Trustee may distribute allowable in-kind income. That is, disbursements to purchase items for the beneficiary other than food, clothing and shelter. 

1. Distribute the goods and services directly to the beneficiary. Buy a television set and deliver it to the beneficiary. Pay for medications not covered by Medi-Cal.

2. Make direct payments to providers who in turn provide the goods or services to the beneficiary. For example, purchase a stereo system from Good Guys who will then deliver the goods to the beneficiary. 

3. You may distribute cash directly to the beneficiary for personal necessities as long as the beneficiary never has more than $2,000 at any given time. Remember, eventhough these purchases are reportable as income to the beneficiary, the in-kind income discussed above is not income which would affect the trust beneficiary’s SSI benefits. While the penalties for in-kind support and maintenance are beyond the scope of this paper, extreme caution should be used if the Trustee does use SNT funds to supplement food, clothing or shelter. For example, the Trustee of the SNT may wish to purchase a home for the beneficiary. In this case, the shelter allowance from SSI would not be needed thereby reducing the federal benefit rate by one-third or the presumed value rule based on the beneficiary’s living arrangement.[8] In addition, Social Security requires periodic reports for all SSI recipients. The Trustee must make these reports if eligibility is to continue. The Trustee or beneficiary must report: 

1. Change in address. 

2. Change in living arrangement including the addition of roommate. 

3. Change in income including the receipt of in-kind income. 

4. Change in countable resources.

5. New eligibility for other public benefits.

6. Change in martial status which could drastically reduce benefits or make the beneficiary ineligible for continued receipt of benefits. 

7. Any intended trip outside of the United States. 

IV. Other Types of Special Needs Trusts. 

Often an elderly or disabled individual is the Plaintiff in a Personal Injury Law Suit. As a result, the settlement proceeds if received directly by that individual will disqualify him or her from continued receipt of government assistance. The Litigation Special Needs Trust is created by order of a Court pursuant to California Probate Code Section 3600 et seq. allowing a disabled beneficiary to shelter the settlement proceeds in a SNT. However, pursuant to Probate Code Section 3605, at the death of the Trust beneficiary or on termination of the Trust, the California Department of Health Services has the right to assert an estate claim against the remaining trust corpus for Medi-Cal payments made on behalf of the trust beneficiary. 

The SNT procedures and recommendations outlined above will still apply and the use of a Trust Advisory Committee may still be advisable. 

V. Conclusion 

In administering the Special Needs Trust, the Trustee must be mindful to protect government benefits, understand the income and resource rules of Social Security including the regulations pertaining to in-kind income which could severely impact eligibility. In addition, the Trustee must remember that the SNT is an irrevocable trust that requires fiduciary accountings and income tax returns. Most importantly, the Trustee must remember that the beneficiary of a SNT is an individual who often cannot advocate for himself/herself and will depend upon the Trustee and/or members of the Trust Advisory Committee to undertake the role of advocate as well financial advisor. The duties of the Trustee administering a SNT go beyond the typical trust administration of the ordinary discretionary spendthrift trust. 

The individual serving as Trustee of a SNT must keep abreast of changes in government benefit law and remain knowledgeable of the resources and programs available to individuals with special needs. The role of Trustee of a SNT is one of great responsibility, but serving in such a role also brings the satisfaction and reward of knowing that you are helping to enrich a “special” person’s quality of life.

[1] 20 CFR §416.202(a) & §416.202(c)-(d) [2] 20 C.F.R. § 416.1002 [3] 20 C.F.R. § 416.1201.(a) [4] 20 C.F.R § 416.1201(a)(1) [5] 20 C.F.R § 416.1201(c) [6] POMS SI 01120.200D.1.b [7] POMS § 01120.200.B.1.b [8] 20 C.F.R. § 416.1130(c)