A “Special Needs Trust” is designed to supplement a disabled person’s quality of life without affecting that person’s eligibility for means tested programs. There are two main types of Special Needs Trusts. A First-Party Special Needs Trust and a Third Party Supplemental Needs Trust. This article will focus on First-Party Special Needs Trusts. For information on the other type, see my prior blog on a Third-Party Supplemental Needs Trust.
Programs like Supplemental Security Income (SSI) and Medicaid (also known as Title XIX or Title 19) are referred to as “means tested” programs, because eligibility is based upon the disabled person’s low income and low asset level. Sadly, a disabled person can be ineligible for means-tested programs like Medicaid and SSI if they are even one dollar over the asset or monthly income limits. One solution is a First-Party Special Needs Trust.
A disabled beneficiary funds a First-Party Special Needs Trust with his or her own funds. Hence, the term “First-Party.” A First-Party Special Needs Trust is also known as a self-settled trust. As a general rule, self-settled trusts are deemed to be either countable assets or penalizing transfers for Medicaid and SSI purposes. Thankfully, federal law (OBRA ’93) creates an exemption for certain types of self-settled trusts.
There are two subcategories of a First-Party Special Needs Trust that are exempt. The first is commonly referred to as a “Special Needs Trust” and sometimes referred to as a “d4A Trust”. The second is commonly referred to as a “Pooled Trust” and sometimes referred to as a “d4C Trust.” The terms d4A and d4C come from the federal statutory authority for these trusts found in 42 U.S.C. 1396p(d)(4)(A) and in 42 U.S.C. 1396p(d)(4)(C).
There are some characteristics common to both Special Needs Trusts and Pooled Trusts. The disabled person establishes both a Special Needs Trust and a Pooled Trust with his or her own funds. If the disabled person is not capable of establishing the trust, the parent, grandparent, or guardian of the disabled person or a court can create the trust. Both types are intended to hold the amount of assets or excess monthly income necessary to bring the disabled person within eligibility limits for programs such as Medicaid, SSI or Qualified Medicare Beneficiary (“QMB”). Each trust can have only one current beneficiary and the Trust funds can only be expended for the disabled person’s sole benefit during his or her lifetime. As a compromise for allowing eligibility for government benefits, these Trusts must contain a payback provision. A payback provision requires that, upon the disabled beneficiary’s death, the balance of the trust repays the state for all amounts of benefits expended on behalf of the disabled person. Both types of trusts are irrevocable; they cannot be changed after signing.
There are also distinct differences between a Special Needs Trusts and a Pooled Trust. A Special Needs Trust can only be established and funded by a disabled person while that person is under the age of 65. In contrast, a Pooled Trust can be established by a person of any age, including those 65 and over. If the disabled person is over 65, however, the income transferred to the trust in a month cannot exceed than average cost of one day in a nursing home (currently $414 in Connecticut) unless the Connecticut Dept. of Social Services approves a spending plan showing the beneficiary will expend all of the income in either 6 months or over the beneficiary’s life expectancy.
Another major difference between a Special Needs Trust and a Pooled Trust is the management and choice of Trustee. The disabled person can name any independent, competent adult to serve as Trustee of a Special Needs Trust. In comparison, only a government-approved, non-profit association can serve as the Trustee of a Pooled Trust. Moreover, the Trustee of a Pooled Trust does not separately manage the disabled person’s funds. Instead, the Trustee pools the investments of all of its beneficiaries and only separately accounts for the disabled person’s portion of those pooled investments. Connecticut has only one approved non-profit association -- PLAN of Connecticut, Inc. of New Britain, CT. Only attorneys who are members of PLAN of Connecticut can set up a Pooled Trust for a disabled beneficiary.
Perhaps the most significant difference between a Special Needs Trust and a Pooled Trust arises when the disabled person dies. With a Special Needs Trust, if any balance remains after the payback to the government, it can go to the remainder beneficiary named by the disabled person (such as a sibling or parent). For a Pooled Trust, the beneficiary can designate that all of the remainder goes either to the pooled trust charitable fund (used for other needy plan beneficiaries) or all to the state of Connecticut. No funds in a Pooled Trust can return to the family of the disabled person.
If you think a First-Party Special Needs Trust could be appropriate for you or a loved one, contact the estate planning attorneys at Cipparone & Zaccaro, PC to discuss this option. Call (860) 442-0150 today.
