Planning for Special Needs Trusts

Special needs trusts are a valuable tool for parents and guardians of disabled individuals. These trusts can help to preserve eligibility for government benefits, provide additional financial support, and ensure that the beneficiary’s needs are met.

Special needs trusts can provide additional resources for disabled minors and adults.  Special care has to be taken in planning for these trusts. 

The recent Estate of Mendard, No. 14-18-00434-CV (Tex. App. — Houston [14th Dist.] 2019) provides an example.  It involves a special needs trust that ended up owning a house that the disabled beneficiary’s relatives lived in rent-free, thereby depleting the assets of the trust for the benefit of the disabled beneficiary’s relatives.

Facts & Procedural History

The case involved a self-settled special needs trust.  The trust owned a house where the incapacitated adult’s relatives resided.  The trust had a corporate trustee.

The incapacitated adult could not reside in the house and her relatives were not paying rent for the use of the house, so the trustee brought suit to evict the relatives and to collect unpaid rents. 

The relatives did not show up to the court hearing or request a continuance in the court proceeding.  Thus, the probate court ordered the relatives to vacate the property.

The relatives vacated the property and then brought this appeal, which the court addressed.  The appeals opinion goes on to address whether the relatives could bring suit given that they had already vacated the property.  We aren’t addressing the substance of the appeal in this post, but note that the continuing appeal only further served to deplete the estate assets that would otherwise be used for the beneficiary of the special needs trust.

About Special Needs Trusts

A special needs trust, also known as a supplemental needs trust, is a legal arrangement created for the benefit of an individual with special needs or disabilities. Its primary purpose is to preserve the person’s eligibility for needs-based government benefits while providing additional financial support beyond what the government programs offer.

The trust is established by a grantor (often a parent or guardian) who contributes assets into the trust for the benefit of the individual with special needs, who is referred to as the beneficiary. The grantor appoints a trustee, who can be a family member, friend, or a professional trustee, to manage the trust assets and make distributions on behalf of the beneficiary.

The key feature of a special needs trust is that it is designed in a way that the assets held within the trust are not counted as the beneficiary’s own resources for the purpose of determining eligibility for government benefits like Medicaid, Supplemental Security Income (“SSI”), or other means-tested programs. These benefits are typically provided based on financial need, and individuals with significant assets or income may not qualify.

There are two main types of special needs trusts: third-party trusts and self-settled trusts.

1. Third-Party Trust: A third-party special needs trust is created and funded by someone other than the beneficiary, such as a parent or grandparent. The assets placed in the trust belong to the third party, and they are used to supplement the beneficiary’s needs without affecting their eligibility for government benefits. There are typically no restrictions on how the funds in a third-party trust can be used.
2. Self-Settled Trust: A self-settled special needs trust, also known as a first-party or d4A trust, is established using the assets of the individual with special needs. This type of trust is typically used when the beneficiary receives a large sum of money, such as through an inheritance or personal injury settlement. However, there are strict legal requirements and limitations imposed on self-settled trusts.

Self-settled trusts are subject to certain restrictions. These restrictions are in place to ensure that the disabled individual cannot use their own assets to fund the trust and immediately qualify for government benefits.

Restrictions on Self-Settled Trusts

One important Medicaid rule that often applies to special needs trusts is found in the Social Security Act, specifically in Section 1917(d)(4). This section outlines the types of trusts are not subject to the provisions and limitations on Medicaid eligibility:

1. Trust for Disabled Individual Under Age 65: This exception applies to a trust that contains the assets of an individual under the age of 65 who is disabled, as defined in section 1614(a)(3). The trust must be established for the benefit of the individual by the individual themselves, a parent, grandparent, legal guardian, or a court. The state will be entitled to receive any remaining amounts in the trust upon the individual’s death, up to the total amount of medical assistance paid on behalf of the individual under the state’s Medicaid plan.
2. Trust Composed of Certain Income: This exception applies to a trust established in a state for the benefit of an individual. The trust can only consist of pension, Social Security, and other income received by the individual, along with accumulated income within the trust. Similar to the previous exception, the state will receive any remaining amounts in the trust upon the individual’s death, up to the total amount of medical assistance paid on behalf of the individual under the state’s Medicaid plan. Additionally, the state must provide medical assistance to individuals described in section 1902(a)(10)(A)(ii)(V) but not for nursing facility services under section 1902(a)(10)(C).
3. Nonprofit Association Trust: This exception applies to a trust that contains the assets of an individual who is disabled, as defined in section 1614(a)(3). The trust must be established and managed by a nonprofit association. Each beneficiary of the trust has a separate account, but the trust can pool the accounts for investment and management purposes. The accounts are established solely for the benefit of disabled individuals by the parent, grandparent, legal guardian, the individuals themselves, or a court. If there are remaining amounts in a beneficiary’s account upon their death, the trust must pay the state an amount equal to the total medical assistance paid on behalf of the beneficiary under the state’s Medicaid plan, unless the remaining amounts are retained by the trust.

The under-65 trust is the most common. For these trusts are for an individual with a disability to establish a self-settled special needs trust without negatively impacting their Medicaid eligibility, the following criteria generally need to be met:

1. The trust must be established for the sole benefit of the individual with the disability.
2. The trust must be established by a parent, grandparent, legal guardian, or a court.
3. The trust must be funded with the assets of the individual with the disability. This typically includes personal injury settlements, inheritances, or other assets owned by the individual.
4. The trust must include a payback provision. This means that upon the beneficiary’s death, any remaining funds in the trust must be used to reimburse the state Medicaid agency for the medical assistance provided during the beneficiary’s lifetime.

Non-Productive Assets in the Trust

While it is not discussed in the case, given the procedural history, we’ll take some liberties to make assumptions.

It appears that the disabled adult inherited the property from her parents.  It also appears that the parents did not provide for a special needs trust during their lifetime, but rather, a management trust was created under the Texas Estates Code as part of the probate process and structured as a special needs trust.

Regardless of the process, the result is that a non-productive asset, i.e., real estate that was not producing rental income, ended up being held in the trust.  The special needs trust was not being used appropriately.  The purpose of the special needs trust is to maximize the resources available to the disabled adult while preserving the ability to get government benefits.

What Kind of Assets Can Be in Special Needs Trusts

When considering which assets to put into a special needs trust, it’s important to focus on assets that will provide long-term financial support and enhance the beneficiary’s quality of life without jeopardizing their eligibility for needs-based government benefits.

Here are some examples of assets commonly placed in a special needs trust:

1. Cash and Investments: Money in bank accounts, certificates of deposit (“CDs”), stocks, bonds, mutual funds, and other investment assets can be placed in the trust to generate income or be used for future expenses.
2. Real Estate: Residential properties, rental properties, land, or other real estate holdings can be transferred to the special needs trust. However, it’s important to note that if the beneficiary lives in a home owned by the trust, certain expenses like mortgage payments, property taxes, and maintenance should be paid directly by the trust to avoid affecting their eligibility for government benefits.
3. Life Insurance Policies: Ownership of life insurance policies can be transferred to the trust. The trust can become the beneficiary of the policy, and the proceeds can be used for the benefit of the individual with special needs.
4. Personal Injury Settlements or Lawsuit Awards: If the beneficiary receives a settlement or award from a personal injury lawsuit, those funds can be placed in the special needs trust. It helps protect the assets and ensures they are used to supplement the beneficiary’s needs while preserving their eligibility for government benefits.
5. Inheritance or Gifts: Inherited assets or gifts received by the beneficiary can be placed in the special needs trust to provide ongoing support and prevent disqualification from needs-based government programs.

There are other assets that generally should not be put into a special needs trust. Supplemental Security Income (“SSI”) or Medicaid payments should not be transferred into the special needs trust, as it may result in the loss of eligibility for those benefits. Also, assets that are not compatible with the purpose of a special needs trust should not be included. For instance, personal-use items like clothing, furniture, or vehicles typically do not need to be placed in the trust.

The Takeaway

This points out a critical aspect of setting up the special needs trust.  One has to pay special attention to the assets that go into the trust.  This is not only important for qualifying the trust as a special needs trust, but, as highlighted by this case, also to ensure that the purpose of the trust is realized.  With self-settled trusts, the assets that are to be contributed to the trust must be segregated into those the disabled person owns at the time and those that third parties own and intend to transfer.  The assets also have to be segregated into productive and nonproductive assets.

Do you need help with a probate matter in Houston or the surrounding area?  We are Houston probate attorneys.  We help clients navigate the probate process.   Call today for a free confidential consultation, 281-219-9090.  

Our Houston Probate Attorneys provide a full range of probate services to our clients, including helping with special needs trusts. Affordable rates, fixed fees, and payment plans are available. We provide step-by-step instructions, guidance, checklists, and more for completing the probate process. We have years of combined experience we can use to support and guide you with probate and estate matters. Call us today for a FREE attorney consultation.

Disclaimer 

The content of this website is for informational purposes only and should not be construed as legal advice. The information presented may not apply to your situation and should not be acted upon without consulting a qualified probate attorney. We encourage you to seek the advice of a competent attorney with any legal questions you may have.