Special Needs Trusts: a Planning Tool With Promise

• Jurisdiction: United States,Federal
• Citation: Vol. 16 No. 2 Pg. 0018
• Publication year: 2010
• Pages: 0018
• Year: 2010
• topic: Trust Law,Public Sector Law,Social Security

Special Needs Trusts A Planning Tool with Promise No. Vol. 16, No. 2, Pg. 18 Georgia Bar Journal October, 2010

A Look at the Law

Special Needs Trusts:A Planning Tool with Promise

by Ruthann P. Lacey

With one in every 26 American families reporting raising a child with a disability,^[1] interest in and demand for special needs trusts is on the rise. The prospective client may be a child or an adult with a lifelong disability or someone newly eligible, because of an accident or illness, for insurance-based programs such as Social Security Disability Insurance (SSDI) and Medicare benefits, as well as needs-based programs such as Supplemental Security Income (SSI) and Medicaid.

While there is not a financial component to gaining eligibility for insurance-based programs, financial criteria are a significant part of the eligibility determination for needs-based programs. As public benefit eligibility law becomes more complicated, it should come as no surprise that legal planning tools are evolving to enable children and adults with disabilities to more easily become eligible for these public benefits while also providing for at least partial reimbursement to the

government for some of these public benefits. Special needs trusts (SNTs, also sometimes known as supplemental needs trusts) are among the legal planning tools that fill this need.

SSI Eligibility Criteria

SSI is a federal welfare program established under Title XVI of the Social Security Act^[2] to provide cash assistance to financially needy individuals who are age 65 or older, or blind or disabled,^[3] to assure such individuals a minimum level of income ($674 per month in 2010).

An individual is considered financially needy if he has "countable assets" of no more than $2,000 (or $3,000 for a married couple),^[4] and has limited income. Assets that are not considered when determining this valuation include: the individual's home place, limited household goods, an automobile, burial spaces and certain life insurance or up to $1,500 designated for funeral expenses.^[5]

The Social Security Administration defines income as "anything you receive in cash or in kind that you can use to meet your needs for food and shelter."^[6] This includes gifts, inheritances,^[7] in-kind assistance, earned and unearned cash and non-cash income and funds received in settlement of a lawsuit or other windfall. To be eligible for SSI benefits in 2010, an individual's countable monthly income cannot exceed $674 (or $1,011 for a couple).^[8] However, because many kinds of income are not counted in determining SSI eligibility, an individual may be eligible for SSI even though his income is somewhat higher.

Medicaid Eligibility Criteria

Medicaid is a joint program between the state and federal governments that pays for necessary health care expenses of eligible individuals.^[9] In Georgia, as in many states, eligibility for SSI automatically entitles the SSI recipient to Medicaid eligibility and coverage.^[10] In fact, in many situations it is the Medicaid benefit that is most valuable to the SSI recipient.

While Congress establishes the Medicaid eligibility criteria, each state applies that criteria as it sees fit. There are a number of different Medicaid programs in Georgia, and each program has specific financial eligibility criteria. The general criteria is that one must be aged, blind or disabled,^[11] have no more than $2,000 in countable resources and may retain exempt resources including the home place, an automobile, certain life insurance, burial spaces and limited funds designated for funeral expenses.^[12]

Why Plan to Maintain Public Benefits Eligibility?

When a child or adult who is presently eligible for SSI or Medicaid benefits receives an inheritance, personal injury settlement or other windfall, these

Courts have held attorneys liable for malpractice for failing to identify and address issues relating to settling litigation and establishing special needs trusts.

resources will be considered by SSI and Medicaid to be "countable resources."^[13] If the value exceeds the $2,000 resource limit, the individual will be ineligible for further benefits. Prudent planning to prolong the benefit of these funds may be appropriate when the individual has needs beyond essential medical care, such that it would be to his benefit to preserve these resources to purchase goods and services not covered by Medicaid.

The objective, however, is not to preserve the funds indefinitely while the individual with a disability relies on public benefits to pay for living and medical expenses. Rather, good planning allows such excess assets to be invested to generate income and then be spent carefully over a longer period of time —ideally for the individual's lifetime — for the full and sole benefit of the individual. If proper planning is not done and SSI and Medicaid benefits are lost, the funds may be spent very quickly for medical care and living expenses and the person will be returned to poverty status before he again becomes eligible for benefits.

Transfer Rules

So, what can legally be done with the excess assets? There are several options. They can be spent to purchase exempt resources that will benefit the individual, or they might be gifted to another individual with the expectation that the recipient will hold the assets for the benefit of the donor. However, if a gift is made, then both SSI and Medicaid rules impose a transfer penalty upon the donor. A penalty is a period of time during which the donor cannot become eligible for SSI or Medicaid benefits because he made this gift.

For SSI purposes,^[14] a transfer made after Dec. 13, 1999, will result in an ineligibility penalty period of up to three years.^[15] This ineligibility period is determined by dividing the total value of the gifts by the maximum monthly SSI benefit effective on the date of application,^[16] but the maximum penalty period is 36 months from the date of the transfer.^[17]

The Medicaid rules, as of Feb. 8, 2006, provide for a five-year lookback, meaning that any transfer made in the five-year window prior to filing an application for Medicaid benefits will be penalized and result in a period of ineligibility for the applicant. A transfer to an individual or a trust may result in a penalty period of as much as 60 months,^[18] which can be extended if a Medicaid application is filed before the penalty period has elapsed.^[19] Thus, if an individual makes a gift of his windfall, he will become ineligible for SSI and Medicaid benefits for a time, during which it will be necessary for him to pay for all of his living and medical expenses from his own funds.

Special Needs Trusts: Exception to the Transfer Rules

Special needs trusts are an important exception to the transfer rules.^[20] A special needs trust is a discretionary spendthrift trust created for a beneficiary with a disability which supplements but does not supplant public benefits for which the beneficiary may be eligible.^[21] It...