Special Needs Trusts: How to Write Them and How to Use Them

1. Special Needs Trusts:How to Write Them and How to Use Them Presented By: Martha C. Brown, Esq. Russell A. Fracassa, Esq.

2. What is a Special Needs Trust? • Also known as a supplemental needs trust • To “supplement,” not replace, public benefits for disabled person

3. What is a Special Needs Trust? • In this context – any type of disability as defined by Social Security at 42 USC 1382c(a)(3)

4. What is a Special Needs Trust? • Different forms of SNTs codified in Omnibus Budget Reconciliation Act in 1993 (OBRA ’93) • Self-Settled or 3rd Party • Inter vivos or Testamentary • Facts and Circumstances will determine type of trust

5. What is a Special Needs Trust? • Three types of SNTs • (d)(4)(A) • (d)(4)(C) • Third Party SNT

6. What is a Special Needs Trust?

7. Drafting Considerations • Not just a form • Risks • Loss of client benefits • Attorney malpractice

8. Drafting Considerations • Grantor trust provisions for income tax • See I.R.C. §§671-679 • Net income taxed to beneficiary • Not on the IRS Form 1041 • Typically lower tax rates

9. Know the Public Benefits • Supplemental Security Income (SSI) • Social Security Disability Insurance (SSDI)

10. Know the Public Benefits • Supplemental Security Income (SSI) • Needs Based • Limited income and assets

11. Know the Public Benefits • Supplemental Security Income (SSI) • Medicaid Qualification • Some states is automatic qualification • MO, not – still have Medicaid qualification • Less than $1,000 • Non-countable resources • Home • One car • Pre-need burial agreements…..

12. Know the Public Benefits • Social Security Disability Insurance (SSDI) • Not means-tested • No financial eligibility requirements • Medicare Qualification • 24 months after receiving SSDI • Some exceptions to the waiting period

13. Distribution Standards • Discretionary vs. Support • Discretionary • No standards for trustee discretion • Support • Support requirements • UTC – Distinction eliminated • Support trusts are discretionary trusts with support standards

14. Distribution Standards • Should only contain pure discretionary distribution standards • Not give a beneficiary any right to compel a distribution • Trustee to have “sole,” “uncontrolled,” “absolute” discretion

15. Distribution Standards • Avoid toxic language as “support and maintenance” • Avoid “Health, education, maintenance and support” language • Highly recommended to spell out grantor’s intent to supplement and not to supplant public benefits

16. Choice of Trustee • Family members often have little fiduciary experience • Family members often do have superior knowledge of the disabled person • Educate family member trustee • Utilize co-trustees include a family member • Courts may desire or require professional trustees

17. Distributions from the Trust • Concept of “in-kind support and maintenance” (ISM) • Payments for necessities of life such as food or shelter • Treated as income to beneficiary • Dollar-for-Dollar reduction in benefits • Limited to one-third

18. POMS • Social Security Administration’s Program Operations Manual System (POMS) • Many changes and clarifications in 2009

19. POMS • Changes affecting drafting • Spendthrift clause – required • Revocation & termination – available • Child support & maintenance – not income • Payback – cannot be limited to time • Sole benefit – no other persons to benefit • Legal authority to establish the trust required • Seed trust

20. POMS • Changes affecting administration • Distributions that are income • Distributions that are not income • Distributions not for the benefit of beneficiary • Distributions for credit cards • Distributions for Gift Cards/Certificates

21. Pooled Trusts • Transfers • As of today, no penalty for transfers occurring at any age • Sole benefit • Account may be established by beneficiary • Payback provision