More than Medical: The Wide Range of Permissible Purchases when Using a Special Needs Trust
October 6, 2020
A Special Needs Trust (SNT) is a type of trust for people with disabilities which is authorized by federal law (42 USC § 1396(d)(4)(a-c)) to be exempt from being counted as a resource by Social Security, Medicaid, and other agencies which administer means-tested benefits. These trusts are often funded by personal injury recoveries, and in these situations a question almost always arises: Will I be limited to spending the money on medical costs? Fortunately, the answer is no!
While this type of trust can (and often is) used to pay for medical needs, there are many other ways the funds can be spent. SNTs are also known as supplemental needs trusts because they are used to supplement government benefits, which are often inadequate. For example, if a person has Medicaid, the trust cannot be used to pay for services or items that Medicaid will pay for, but it could be used to pay for experimental treatments, for therapies not covered by Medicaid or to secure services above and beyond what Medicaid covers. The primary goal of this kind of trust is to maximize care and improve the life of the beneficiary. For that reason, these trusts have a “sole benefit” standard, which means the funds can be used only for the beneficiary.
The trustee determines how the money in the trust is spent. The trustee can be an individual or an organization, but either way the trustee needs to be knowledgeable in public benefits and what will/will not be allowed by the relevant agencies. The goal is generally to preserve public benefits, and most of the time that means not doing anything that will reduce or negatively impact those benefits. Some trusts are written with strict language to this effect; however, most trusts allow a trustee discretion to take action that will cause a reduction in benefits only if it is in the best interest of the beneficiary. For example, if a person has Supplemental Security Income (SSI) and the trust pays for food or shelter expenses (which includes rent), the SSI check will be reduced by up to 1/3 of the Federal Benefit Rate ($783 in 2020), which equates to $261 at the time of this writing. Social Security has this rule because SSI is supposed to cover food and shelter expenses for the month, regardless of how impossible that may seem. If the trust is written in such a way as to prevent the trustee from taking any action that would cause a reduction in benefits, they would not ever be able to pay for food or shelter items, even if that forces the beneficiary to live in poverty despite having a million dollars in their trust. Most trusts now are written with a best interest standard, which does allow the trustee to pay housing expenses so long as it is in the beneficiary’s best interest despite what they might lose from their SSI check. For example, the trustee might authorize the use of the funds to pay for an apartment where the beneficiary will have a higher standard of living.
Beyond the sole benefit rule and the requirement to supplement benefits, the trust can generally be used to buy services or anything that is an “exempt” resource. Exempt means it is not counted by the relevant public benefits agencies. Every agency has its own rules on what is exempt, but most exempt a home, a vehicle, and household items and effects. Travel is also permissible, including the travel expenses of a caregiver (or more if the person needs round-the-clock care), as well as lawn services, cleaning services, etc.
There is more grey area when it comes to “luxury” items. Social Security does not exempt items held solely for value, such as gemstones and gold, but jewelry made of these materials that is worn from time to time is exempt. A swimming pool or hot tub is generally thought of as a luxury item but is sometimes recommended for therapeutic reasons. In that case, the trustee would want documentation from a doctor to support the need and would want to see costs controlled as much as possible. When assessing whether something is payable from the trust, the trustee will weigh the benefit of the purchase with the beneficiary’s needs and the public benefit rules that apply.
Finally, no one wants to think about planning for their own death, but this is something SNTs are often used for. Once a person dies, their trust is essentially locked because the trustee of an SNT has a duty to notify Medicaid and use remaining funds to pay back Medicaid for care provided during the beneficiary’s lifetime (except for any liens resolved at settlement). Until that happens, which can take weeks or months, no one can touch the funds in the trust. What a person can do, however, is use their trust (before they die) to pre-pay a funeral contract or purchase burial insurance. This takes a heavy burden off the family and allows the person to have control over their final disposition. Both are exempt resources, although some Medicaid agencies limit the amount of money that can be set aside for burial expenses. An SNT can also be used for other planning such as hiring an estate planner or attorney.
The rules that govern SNTs can seem overwhelming and even frustrating at times, and most would say they are unnecessarily restrictive. This is certainly understandable, especially when someone desires to move on after an injury and enjoy their life, but the list of permissible expenditures is longer than many give credit for. A trustee who understands the beneficiary’s goals and has a thorough understanding of the rules and standards that apply can be an invaluable resource when it comes to making the most of a settlement recovery.