Helping Your Client Select a Special Needs Trust
February 2, 2021
Evelynn Passino, J.D.
If you have a client on government benefits, you probably already identified the need for a special needs trust (SNT), but helping your client translate that need into a solution that will work for them long-term can be tricky. Not all trusts and trustees are cut from the same cloth, and the right option for one client is unlikely to be the right option for another.
Types of SNTs
If you are unfamiliar with SNTs, the first thing to understand is that the term can mean several different things. Generally, an SNT is a type of trust authorized by federal law (42 U.S. Code § 1396p(d)(4)(a, c) to be a non-countable resource for means-tested benefits, if properly established and administered. There are two ways an SNT can be set up: standalone or pooled.
A standalone trust (also known as a “d4a” trust) is one which is drafted and administered specifically for the client. There is some degree of customization and the trustee can be hand-picked, whether it be an individual or a corporate trustee such as a bank.
A pooled trust (or “d4c” trust) is where many people can join one master trust by completing a joinder agreement. All funds are pooled and invested together which provides more options and generally yields better results than if the client invested their money on their own. The investment gains are distributed among the beneficiaries pro rata. The joinder agreement creates a sub-account within the trust for the client where the funds they deposited are maintained for their use. Personalization is limited and the trustee will be a non-profit association as required by federal and stated in the master trust.
Below is a series of questions to review as you help your clients decide among their options.
What benefit(s) do they have?
First things first, you must understand what benefits the client has and what the qualifications are. A deep dive on these benefits is beyond the scope of this article, but the primary issue is whether the benefit is income or asset sensitive.
Social Security Disability (SSD), Social Security Retirement, and Medicare are not income or asset sensitive. While this probably means an SNT is not necessary, it might still be desirable. If a client is likely to be on a resource-sensitive benefit, such as Medicaid, in the future, an SNT can help protect their future eligibility for benefits without having to do Medicaid “crisis planning” later. A scenario where this frequently is the case is when an injury victim may need nursing home care in the future since Medicare will not cover the cost and only Medicaid will.
Other benefits, such as Supplemental Security Income (SSI), Medicaid, Supplemental Nutrition Assistance Program (SNAP) benefits, and housing benefits, generally are income or asset sensitive. With the exception of SSI, these benefits are administered by state agencies, so the rules and qualifications can vary widely. Your client’s Medicaid benefit might be income or asset sensitive, or it might be neither, so knowing which it is helps your client make an informed decision. The best practice is to get copies of ID cards and award letters to understand whether your client has any benefits that need to be protected.
How old is your client?
If your client is approaching or over 65, their age is relevant to the options available. First, standalone trusts cannot be created or funded for people age 65 or older, so once they reach that age, a pooled trust is their only option if they need an SNT. Second, in many states Medicaid imposes a penalty (a period in which the benefit is suspended) if someone age 65 or older funds a pooled trust. The SSI program also imposes a penalty on funding pooled trusts after age 65, although there is an exception for annuity payments received after age 65 if the structured settlement was established and payments irrevocably assigned to the trust before age 65. If your client is approaching this age, they should decide one way or the other before turning 65.
If your client is a child, the funds will need to be protected whether by a trust or restricted account. Restricted accounts can be problematic because a court order is needed to access any of the funds, while the money in a trust can typically be accessed by the trustee (unless a court orders otherwise). This can give the parents more flexibility to use the money to supplement the child’s care, which may be very important if the child has significant medical needs. An SNT is not the only way to achieve this, but if funds are expected to last into adulthood and the child is likely to be on means-tested benefits when they turn 18, then an SNT should be considered.
Finally, if the client was disabled before turning 26, they should also explore ABLE accounts. An ABLE account is like an SNT in that it protects eligibility for public benefits, but the client controls the account, there is no trustee, and an attorney is not needed to set it up. There are some limitations to ABLE Accounts, like an annual contribution limit of $15,000, so often an SNT is still necessary to hold excess funds, but you can read more on our blog about how the two can work well together.
How much money are they getting?
How much money the client will net is relevant for two reasons. First, just because your client has a means-tested benefit and will net more than $2,000, does not mean they need an SNT. Second, the amount may limit the options available.
To the first point, if the client is getting any amount of money but has an immediate need to spend it, they may not need an SNT. For example, if the client is receiving $100,000, but they need a new car, need to make significant modifications to their home, and have debt to pay, it may be feasible for them “spend down” the money on exempt assets. This does take some planning, and the client may lose eligibility for benefits temporarily, but due to the time and cost associated with setting up a trust, this is an option worth exploring with a qualified special needs law or elder law attorney who will be familiar with the rules, regulations, and ramifications applicable to your client.
The amount of money they receive may also dictate what kind of trust they use. Having a standalone SNT drafted from scratch and hiring a private trustee to administer it may be cost prohibitive as compared with a pooled trust. One of the benefits of pooled trusts is that it is already established, so the cost to join is generally low (many are less than $1,000), whereas drafting a new standalone trust may result in legal fees upwards of $5,000. Trustees of pooled special needs trusts, because they are non-profits, also tend to charge less in annual fees than private for-profit banks. Many banks require a minimum amount in assets, which can easily be $500,000 or $1 million. A client who is only receiving a more moderate settlement may be limited in terms of their options when it comes to finding a suitable experienced trustee. Oftentimes, a pooled special needs trust with a non-profit trustee will make the most sense in these situations.
What are the client’s needs, goals, and wants?
While the attorney handling the settlement has an obligation to help the client understand their options and make an informed decision, they do not have an obligation to preserve the client’s benefits if the client does not want to preserve them.
There are a number of rules and restrictions that come with SNTs that can make them unattractive. The big one is control. The reason why SNTs are not considered a countable resource is because the client relinquishes control over the funds to the trustee. Further, because SNTs are irrevocable, this is effectively a permanent decision unless the client gets a court order dissolving their trust. The beneficiary certainly has input, but the how and when the money is spent is ultimately up to the trustee. This can create tension when the two disagree and, depending on how the funds in the trust are used, the requirement to submit detailed receipts for purchases can feel invasive. If these are deal-breakers, a client may want to give up their benefits in exchange for the freedom to do what they want with their money.
Unfortunately, not all clients have the luxury of forgoing their benefits. It is especially important in those cases that the client be comfortable with their chosen trustee and the rules of their trust. Before talking to pooled trusts or private trustees, it is a good idea to take stock of the clients needs, goals, and wants so these can be discussed with any potential trustee during the consultation stage. Some trustees are conservative in their view of the regulations that inform trust policies, while others are more liberal. Some pooled trusts offer support and resources, like care management and community-based programs, while others are more transactional and operate like a bank. If your client has a brain injury, mental health disorder, or history of substance abuse, it is advisable to select a more hands-on trustee. Some non-profit trustees specialize when it comes to particular conditions and can provide more tailored support services.
If your client wants to buy a home or vehicle, they should understand what the trustee’s processes and requirements will be, as well as how the purchase will be titled. If your client wants start a business, seek new or experimental medical treatments, get elective surgery, or travel internationally, just to name a few examples, the trustee might have policies about or against these things. Your client should understand how they will be able to access the money in their trust, the methodology used to make decisions, the amount of time a trustee needs to process a payment, the trustee’s business hours, etc. These are all areas where trustees can reasonably vary in terms of how, why, or if they do them.
Special Considerations for Pooled Trusts
If your client is considering a pooled trust, there is one final point of consideration. As a matter of course, first-party SNTs require that if the beneficiary dies and there are still funds in the trust, then Medicaid has a right to be repaid from those funds. For standalone trusts, the rule is simple: upon the beneficiary’s death, the trustee finds out how much the Medicaid lien is, then they cut a check to Medicaid, and if there is still money in the trust after the lien has been paid, then whatever is left goes to the remainder beneficiaries designated when the trust was created. For pooled trusts, this is more complicated because non-profit pooled trust trustees have the right to retain some or all of the funds remaining at death, subject to state law and Medicaid regulations. The amount is left up to the trustee and will be stated in the trust’s documents. It is important to understand how much the trustee intends to retain and if this will be calculated before or after Medicaid is paid back.
Whether a client needs a special needs trust, what kind of trust to select, and what kind of trustee to work with are all issues highly specific to the client. There are many options available and while trustees can be changed, SNTs are irrevocable, so it pays to shop around. No client should have “buyer’s remorse” because they placed their funds in a trust that is overly restrictive or with a trustee who is not aligned with their goals and values.
 As of 2020, the following states impose penalties in some or all cases: AZ, CO, CT, GA, HI, IL, KS, LA, ME, MN, MS, NC, ND, NE, NH, NJ, NM, NV, NY, MI, MO, OK, OR, PA, SC, SD, TX, UT, VA, VT, WA, and WY. To fully understand how this may impact your client, consult with an elder law or special needs law attorney in your state.