Disability and other special needs often limit a child’s capacity to become independent and financially secure as an adult, which is why planning for your child’s special needs future is so important. This is particularly true today, with declining government entitlements and rising costs of care. At the Osofsky Law Firm, we can help ease your financial burdens now, by making the best use of government programs currently available, and by using strategies such as Special Needs Trusts to protect your special needs child after you are gone. Considering the fact that accident or illness can strike a loved one at any time, resulting in disability at any age, every good Estate Plan should include standby phrasing for such contingencies.

Frequently Asked Questions:

Q: What is a Special Needs Trust?

Answer: A Special Needs Trust is a special kind of Trust designed to hold money, savings accounts, a house, or other assets for the benefit of a disabled person receiving government benefits, such as Supplemental Security Income (“SSI”) or Medi-Cal. The assets are held in the name of the Trustee, so that they will not be treated as being owned by the disabled individual and thus will not interfere with his or her receipt of public benefits. The purpose of the Special Needs Trust (“SNT”) is to use these funds to enhance the lifestyle and well being of the disabled individual by supplementing, and not replacing, his or her receipt of public benefits.

Q: I have also heard the phrase “Supplemental Needs Trust”. Is that the same thing as a Special Needs Trust?

Answer: Yes. The terms are often used interchangeably, but the concept is the same: the funds in the SNT are used to supplement the needs and expenses of the disabled individual receiving SSI or Medi-Cal.

Q: Who can set up a Special Needs Trust?

Answer: A SNT can be set up by anyone for the benefit of a disabled individual. Typically, the SNT is set up by a parent, grandparent, brother or sister, for the benefit of a disabled child or sibling receiving SSI and Medi-Cal. However, it can also be set up by the disabled individual, himself, in certain circumstances, such as where the disabled person is about to receive an inheritance or settlement for personal injuries or medical malpractice. Where the disabled individual, himself, sets up the SNT, it is often called a “self-settled” SNT. However, this “self-settled” SNT may only work if the disabled individual is under age 65 at the time that the SNT is created and funded.

Q: Whose Assets Can Be Used to Fund the Special Needs Trust?

Answer: If the SNT is set up by someone other than the disabled individual, such as by the parent or grandparent, the initial funding would typically be with the assets of the parent or grandparent. However, once the SNT is created, any other family member could also contribute to it, so that—over time—the SNT could accumulate additional family resources for the benefit of the disabled family member. Money, stocks & bonds, rental property, a home, or any other asset of value can be used to fund the SNT. Some parents choose to fund the SNT with life insurance, which pays off only upon their death.

Q: Can the Disabled Individual Fund His Own SNT?

Answer: Yes, in many cases, monies belonging to, or about to be received by, a disabled individual can be used to create a SNT for that very individual! The rules here are much more restrictive and sometimes require a court order to create this trust. Further, the rules may only permit an individual to create his or her own SNT if under age 65. We call this kind of SNT, when funded with the disabled individual’s own money, a “Self-Settled SNT”. The other kind, referring to a SNT created by a parent or grandparent, is sometimes called a “Third Party SNT”. However, once created, both kinds of SNT’s operate by the same rules, with one important exception: the Self-Settled SNT requires, to the extent of any funds remaining on the death of the disabled beneficiary, payback to the state up to the amount of Medi-Cal benefits paid out. There is currently no payback for SSI payments and none for Third Party SNT’s.

Q: Why Can’t the SNT Just Pay out Money Outright to the Disabled Individual So That He Can Use the Money to Buy Whatever He Wishes?

Answer: Because entitlement to both SSI and Medi-Cal is linked to how much money the beneficiary has. Example: if $300 a month were given to the SSI beneficiary directly, SSI would reduce his SSI benefit by $300, thereby resulting in no increased benefit or supplement to him. However, if the SNT paid this $300 directly to the providers of goods and services, then there may be only modest or,  in many cases, no reduction in the SSI benefits received. These payments to providers would not be treated as direct income to the disabled beneficiary, but instead would be treated as “in kind” support, which is treated more favorably for the SNT beneficiary.

Q: How Do the in Kind Support and Maintenance Rules Work?

Answer: In Kind Support and Maintenance (“ISM”), refers to payments made directly to providers of goods and services (such as a landlord, grocer, auto repair shop, etc.) for the benefit of the disabled beneficiary. Since the payments are not received directly by the disabled individual, they are referred to as “in kind” support. Whether SSI is reduced by these payments depends upon what the payments are for. If the payments are for anything considered “food” or “housing”, there would then be a ‘modest reduction’ in the SSI payment: If payments were for things other than food and housing, there would be no reduction whatever in the SSI payment. Examples of the latter: entertainment, an automobile, air plane ticket, etc.

Q: If the Payments Are for Food or Housing, How Much Would SSI Reduce?

Answer: Payments made to providers for food or housing expenses of the beneficiary will reduce his SSI benefits, but not by more than a specific cap, which is set by law each year and is indexed to inflation. In 2010, that magic number is $244.66 for an individual and $346.34 for a couple. This cap is called the “Presumed Maximum Value”, or PMV. Example: A SNT could pay out $1,500/month in rent for a disabled individual, but his SSI reduction would not exceed $244.66. In other words, the beneficiary would be getting an apartment worth $1,500 a month, but at a net cost to his SSI of only $244.66 each month. Similarly, a SNT could also provide him groceries worth $500 in the same month, and the total SSI reduction for that month would still be no more than $244.66.

Q: You Mention That in Some Cases There Would Be “0” Reduction in SSI Benefits; Please Explain?

Answer: Remember, only payments to providers that are for food or housing are reduced by this $232.33 PMV cap. Payments to providers for things that are not food or housing result in no reduction whatever to the SSI payment. Example: the SNT purchases an automobile for the use of the disabled beneficiary and, each month pays the merchant for the gas, insurance, maintenance, repairs and upkeep to the vehicle for his use. Since the automobile is not food or housing, there is no reduction whatsoever to his ongoing SSI. Further, since the assets used to pay for these ongoing expenses are held by the Trustee of the SNT, they do not undermine the beneficiary’s ongoing public benefits, since he does not own or control them.

Q: Can the SNT Buy a House for the Use of the Disabled Individual?

Answer: Yes. If the SNT purchases the house outright for, say $400,000, the total reduction in the individual’s SSI for that one month would be limited to $244.66 in the year 2010! If there were no mortgage, there would be no further SSI reduction in months thereafter. Alternatively, if the home were purchased using a mortgage, each additional monthly mortgage payment would result in a maximum reduction of $244.66 each month. The SNT is a perfect vehicle for the purchase of a home for a disabled individual.

Q: Can the Parent Make These Payments for the Benefit of the Disabled Son Informally, Without Setting up a SNT and with the Same Results?

Answer: Yes. So long as the parent is mindful of the particular rules that affect SSI and Medi-Cal and makes the proper reporting, a parent can supplement the expenses of the disabled son in the very same way. However, what happens when the parent becomes incapacitated or dies? It is often helpful to set up an SNT during the parents’ lifetime, so that it will be available and operational upon the parents’ demise. A further reason to set up a SNT during lifetime is so that other family members may contribute to it, and all monies can then be administered under central control and in a way that minimizes any adverse impact upon the beneficiary’s SSI or Medi-Cal.

Q: Does the Law Support Use of SNT’s?

Answer: Yes. Both federal and state law expressly approve of the use of SNT’s to supplement the living expenses of a disabled beneficiary receiving public benefits.

Q: Is a SNT Difficult or Expensive to Set Up?

Answer: Creating a SNT requires specialized legal skill and should only be created by an Elder Law attorney knowledgeable in public benefits law. Setting up a SNT is an investment in your loved one’s future well-being, and should be viewed as a loving and lasting gift to him or her. The professional fees associated with creating such a trust will depend upon a number of factors, including: the nature of the SNT created, whose assets will be used to fund it, whether a court petition will be required, whether it will be created as a “stand alone” trust or as part of the parent’s or grandparent’s general estate planning documents, whether it will be funded immediately upon creation or funded only later upon the parents’ demise, and whether a family member or a professional trustee will be selected to administer it. All of these factors can be discussed with the attorney that you have chosen to design your Special Needs Trust.

Note: These questions and answers are for general reference only and are not intended as specific legal advice for your particular situation. An attorney specializing in Elder Law should be consulted regarding your personal needs.

For more information about Special Needs Planning: