Prepare for the Future With a Special Needs Trust

By: Martha A. Churchill and Patricia E. Kefalas Dudek

Mrs. Client has an adult son, Freddie, who resides in her home. Freddie was born with a developmental disability¹. Freddie's grandmother wishes to give him a generous bequest in her will. Mrs. Client hopes to set up a trust so that Freddie can some day enjoy his grandmother's money, without jeopardizing his state or federal benefits.

A special needs trust ² is crucial to Freddie's future. More than likely, he will someday have to face life without his parents' financial help. Without a trust, he will have to survive solely on his SSI benefits, which are well below the poverty level³.  But if he receives an inheritance outright, he will lose his SSI and Medicaid.

Medicaid covers much more than a few doctor bills for Freddie. For example, it pays for his case manager at community mental health. It covers a behavioral therapist to help him relate appropriately with others, and it makes him eligible for a host of local community services. Medicaid may even pay for his dentist, who specializes in providing care for persons with special needs⁴.

There would be no point giving Freddie a testamentary bequest if it meant the loss of all his benefits. Then, Freddie would have to use any inheritance to pay for the things Medicaid now covers. The money would be wasted without a special needs trust; grandmother might as well bequeath it to the State of Michigan⁵.

If Freddie is lucky enough to have a trust, though, his trustee could send him to summer camp or buy him a plane ticket to Albuquerque to visit his favorite aunt or pay the retainer for an attorney, in case of a legal emergency. (Some persons with special needs are interrogated by the police, and confess to crimes that they did not commit, due to their high suggestibility).

Trust money can be used for uninsured medical or dental treatments. It can pay for private rehabilitation, schooling and recreation. It can cover ball games, camping trips, roller blades, pizza parties, vitamins, or even a travel companion. The money can assist him in reaching his maximum potential and quality of life, and then eventually pay for his funeral. These are all "extras" he cannot afford on poverty level SSI income and Medicaid, alone.

The hallmark of this trust is that the trustee has full discretion to spend the money however he or she sees fit⁶.  Then a governmental agency will not be able to claim that Freddie has any legal right to the trust funds. In doing this, his creditors also should be excluded.

If the money to be placed in a special needs trust originates with the beneficiary, (a "self-settled" trust,) special language is required for the residuary clause. This is necessary if the beneficiary received a settlement from a lawsuit, an inheritance, or has saved up his own earnings from a part-time job⁷. Trust language required in that situation is further explained later in this article.

The attorney should also understand Social Security and Medicaid benefits when working with Mrs. Client. By way of illustration, Freddie is 35 years old, and receives SSI, or Supplemental Security Income, due to his mental disability. When his father retires, dies or becomes disabled, Freddie will qualify for benefits under SSDI, or Social Security Disability Income, based on his father's earnings⁸.

Freddie currently qualifies for SSI because he does not have liquid assets in excess of $2,000. Neither parent has retired, died or become disabled. The federal government would allow him to own certain property, such as a car or home⁹,  without losing his SSI. Freddie needs flexibility, and the trust can provide that by buying or selling a home for his benefit without affecting his Social Security benefits¹⁰.

Some day, when Freddie starts receiving SSDI instead of SSI, his assets will no longer affect his right to receive the cash benefits. However, he will still have to keep his bank account, and other liquid assets, below $2,000 to qualify for Medicaid and other services through the public mental health system.

The solution: make sure Freddie spends the money received from SSI or SSDI on food, clothing and shelter. If he needs something special or expensive, such as an electronic video game, the trust can buy it for him. The trust should not spend money on his food, clothing, or shelter (his basic needs), since that will be considered "income" for SSI or Medicaid purposes¹¹.    The trust should be titled the "Irrevocable Special Needs Trust f/b/o Freddie Last name." and include discretionary language such as the following:

"Under no circumstance shall Freddie have the power or authority to demand any distribution from the Trustee who is under no obligation, implied or otherwise to make any distribution to Freddie. Further, the Trustee may withhold distributions to Freddie if, in its sole discretion, they would not be consistent with intentions as expressed in this Agreement. The Trustee shall use its best efforts to avoid distributions which may cause disqualification for any entitlement to which Freddie is or may be eligible" or,

"Trustee has full discretion to spend the trust income or principal, or not to spend it, as he or she sees fit. Beneficiary shall have no legal right to the trust assets, even in case of emergency. Any attempt by Beneficiary to assign his or her interest in the trust shall be null and void."

In addition, the trustee needs direction, not to spend trust funds on food, clothing, or shelter, which would cause problems with Freddie's SSI eligibility:

"To the extent that Freddie is eligible for any public benefits to provide for his basic support and maintenance, during the term of this Trust, Grantor directs that distributions from this Trust Agreement shall be used solely for supplementing those benefits which are available to him. In as much as possible, the Trustee is to administer this Trust so that Freddie's eligibility for public governmental assistance programs is not endangered."

Not making a distribution for food, clothing and shelter is especially important for SSI purposes, but Medicaid is not as strict. Either government program could consider it "income" if third parties are providing food, clothing, or shelter to a person with a disability. The rules are a bit elaborate; SSI allows Freddie and his family to plant a garden and eat their own tomatoes, without calling it "income"¹², but if Freddie wins a cash prize for the biggest tomato at the town fair, that would be income¹³.

If the trust buys a house, it should rent it to Freddie. The rent should be low enough so that he can afford to buy his own food and clothing. Another option available to Freddie is a housing subsidy from the local community mental health agency. In sum, he should spend nearly all of his monthly Social Security check on necessities, and let the trust buy the extras that enrich his life.

A wonderful byproduct of the special needs trust, is that it can serve as a Medicaid planning tool for the disabled person's parent or grandparent. Suppose Freddie's grandmother needs long term care in a nursing facility. Pursuant to 42 U.S.C. § 1396p(c)(2)(B), she can transfer money to a disability trust without penalty for Medicaid eligibility purposes, so long as the beneficiary is under age 65. If Freddie's Grandmother needs to qualify for Medicaid, she can do so through the special needs trust without exhausting her life savings. Plus, she will have the satisfaction of assisting Freddie by funding the Irrevocable Special Needs Trust fJb/o Freddie.

Next section:  Choosing a trustee

Martha A Churchill
Milan, Michigan.

Patricia E. Kefalas Dudek
Royal Oak, Michigan.

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