Of the 53.9 million school-age children 5 to 17, about 2.8 million were reported as having a disability in 2010. Parents of children with special needs face the uncertainty of knowing whether the child may be able to support himself in adulthood.    Monetary lifetime gifts or future inheritances can significantly impact an adult disabled child’s receipt of critical public benefits that provide income, housing and health insurance.   Preservation and management of financial assets for persons with disabilities are common concerns of parents with disabled children.   Fortunately, a certain type of trust, often referred to as a “special needs” or “supplemental needs” trust, can be an effective solution to provide for a disabled person, both during a parent’s life and after the parent’s death.

Here are a few common questions our elder law attorneys address during a meeting with parents of disabled children in Massachusetts:

What is a supplemental needs trust?  

Supplemental needs trusts (also known as “special needs” trusts) are drafted so that the funds will not be considered to belong to the beneficiary in determining his or her eligibility for public benefits, such as Medicaid, Supplemental Security Income (SSI), or public housing.  These trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds, such as education, recreation, counseling, and medical attention beyond what is required simply to maintain an individual.

Who can create a supplemental needs trust?

Very often supplemental needs trusts are created by a parent or other family member for a disabled child (even though the child may be an adult by the time the trust is created or funded).  But the disabled individual can often create the trust himself or herself, depending on the program for which he or she seeks benefits.  Medicaid is the most restrictive program in this regard, making it difficult for a beneficiary to create a trust for his or her own benefit.  But even Medicaid has a “safe harbor” allowing for the creation of a supplemental needs trust with a beneficiary’s own money if the trust meets certain requirements.  This is sometimes called a “(d)(4)(A)” trust, referring the authorizing statute.

Must the supplemental trust be irrevocable?

Yes, if it is created and funded by the person seeking public benefits him or herself.  No, if it is created and funded by someone else for the benefit of person receiving or seeking public benefits.

Who can serve as trustee?

Choosing a trustee can be a difficult decision.  The basic question to consider is whether to choose a professional trustee (such as a bank or attorney) or to use family.  Family and friends can serve as trustee, but it is important to consider whether they have the experience and qualifications to serve in this role.  The only person who cannot serve as trustee is the beneficiary themselves as this could disqualify them for public benefits.

When choosing a trustee, the factors to be considered include the cost of the available parties, relative investment experience, and flexibility and bureaucracy. Additionally, the trustee’s knowledge of public benefits programs and their regulations, as well as the beneficiary’s special needs and circumstances, should be considered.  Often it can make sense to split the necessary trustee roles, with a bank or trust company handling investments and accounting, a family member or social worker taking care of planning for the beneficiary and disbursements, and an elder law attorney advising on public benefits issues.  This can be done through multiple trustees, or a single trustee advised by individuals with the necessary knowledge and experience.

Are there restrictions on how the funds in the supplemental needs trust may be spent?

Yes and no.  Yes, each public benefits program has restrictions that must be complied with in order not to jeopardize the beneficiary’s continued eligibility for public benefits.

For instance, the beneficiary would lose a dollar of SSI benefits for every dollar paid to him or her directly.  In addition, payments by the trust for food, or housing for the beneficiary are considered “in kind” income and, again, the SSI benefit will be cut one dollar for every dollar of value of such “in kind” income.  Some attorneys draft the trusts to limit the trustee’s discretion to make such payments.  Others do not limit the trustee’s discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future.  The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.

How and when is the trust funded?

The trust is often funded upon the death of the last parent.  Although retirement assets   can be directed into supplemental needs trusts, it is often a complicated procedure that can produce adverse tax consequences.  Accordingly, non-retirement assets or life insurance provide better funding options.

All of our attorneys specialize in elder and disability law.  If you are a parent of a disabled child in Massachusetts and have additional questions, feel free to contact us at our Boston or Raynham locations.

Regards,

Eric R. Oalican, Esq.