February 19, 2020 • Education

Special Needs Trust Basics: What Should I Consider?

calculator with coins

Navigating through complex settlement options can be difficult.  Having a resource, like a professional administrator, can be beneficial in deciphering post-settlement solutions and how best to move forward in protecting your client and their future.

Recently, our team has recognized an increasing number of cases including a trust component, as they are a common instrument utilized in settling both worker’s compensation and liability cases.  Whether the purpose of the trust is for protection of public benefits now or in the future, delineating beneficiaries upon death, or spendthrift protection; knowing when a trust should be utilized and which trust option is most appropriate can be a windy road to navigate. 

What is a Special Needs Trust?

We will take a brief look at a special needs trust (SNT) and things to consider when selecting the appropriate option.  A SNT, also known as a supplemental needs trust, is a unique instrument utilized by a disabled individual needing to protect funds often from a personal injury award, workers' compensation settlement or an inheritance for the sake of maintaining needs-based government benefit eligibility.  SNT’s were created as an available option in 1993, as part of 42 U.S.C. § 1396p, for disabled individuals to establish an irrevocable trust to serve as the safe harbor for such assets.  By placing the funds into the SNT, the disabled beneficiary will preserve their needs-based benefits, while still having the trustee utilizing funds to improve their overall quality of life.  Often, money meant for future medical care is included in the settlement funds and these funds also would need to be protected to maintain or qualify for needs-based benefits. Typically, funds meant for medical care are designated in the settlement by a Medicare Set-Aside, Medical Cost Projection, or Life Care Plan report. 

Trusts and Benefits: What You Should Know

First, it is imperative to know the various types of benefits offered through state and federal programs and when an SNT is necessary to protect them.  There are two main types of benefits a disabled individual may receive:

  • Entitlement Benefits – do not require an SNT to be preserved
  • Needs-Based Benefits – SNT will protect

Entitlement benefits are typically Social Security Disability Insurance (SSDI) and Medicare.  In order to receive SSDI benefits, an individual qualifies by contributing for a certain number of years through payroll into Federal Insurance Contributions Act (FICA) Social Security taxes.  Similarly, Medicare is for individuals at age 65 and older, or for those under age 65 with a disability who are also receiving SSDI for more than 24 months.  Neither of these benefits are needs-based and will not require a SNT to protect the eligibility.  Regular Social Security, or retirement benefits, also fall in this category.

However, needs-based public benefits, such as Supplement Security Income (SSI) and Medicaid programs, are based upon a disabled individual’s resources because income and asset limitations apply.  The purpose of SSI is to provide cash assistance to those with low income or limited assets who are aged, blind, or disabled.  Additionally, healthcare coverage is available through state Medicaid programs for the same purpose.  In order to qualify, the resource limit for SSI and Medicaid must be followed.  Also, it should be noted, there are typically a few disability determinations for eligibility status based upon where the individual resides (see footer for more detail).

Types of Special Needs Trusts

Once the injured party’s current benefits have been determined, you can move on to select the appropriate type of trust.  There are two main categories of special needs trusts to protect needs-based benefits:

  1. First-party special needs trust
  2. Third-party special needs trust

For the sake of this article, we will overview the first-party trusts, as they are most commonly used in settlements.  These accounts are created from a disabled individuals’ own funds; therefore, getting the name “self-settled.”  These trusts are called either a self-settled (d)(4)(A) trust or a pooled (d)(4)(C) trust, and have statutory requirements as provided by 42 U.S.C. § 1396p(d)(4).  Whether the individual has received the funds from earned income, a settlement, or award; the funds belong to the individual and person for which the creation of the SNT is needed. 

It’s important to note that any property included in the first-party SNT must be used for the sole benefit of the beneficiary.  First-party trusts are also considered “Medicaid-payback trusts”, since a payback provision must be included in the trust instrument to repay Medicaid for expenses paid during the beneficiary’s lifetime. In other words, if there are funds remaining in the trust at the time of the beneficiary’s death, the funds must first go to reimbursing Medicaid for medical expenses paid for the individual before they can be directed elsewhere.

Both the d4A trust and d4C trust are administered by an independent party and are considered discretionary, irrevocable trusts.  In order to be eligible to establish a special needs trust, the beneficiary must be deemed disabled by Social Security Administration.  Additionally, there are other requirements to consider.  Briefly, let’s outline some specifics regarding these trusts:

D4A: An individual first-party trust that can be established by the mentally and legally competent beneficiary, the beneficiary’s parent, grandparent, legal guardian or court.  The trust agreement is individually created to establish the trust.  The trustee can be an individual or for-profit entity. The beneficiary must be under the age of 65 when the trust is funded.

D4C: A pooled first-party trust can only be established through a non-profit association.  The non-profit assists various beneficiaries by maintaining a sub-account for each individual under the same master trust.  The trust can be created by the mentally and legally competent beneficiary, the beneficiary’s parent, grandparent, guardian, or court.  Additionally, the trust instrument is a state-specific Master Trust Agreement used for all beneficiaries, as well as a Joinder Agreement to be completed by the beneficiary with their personal information.  The non-profit association will pool together the assets from all beneficiaries for investment purposes. 

Additionally, a d4C pooled special needs trust account may be established for an individual of any age, including over the age of 65.  Depending upon the state in which the beneficiary resides, a transfer penalty may be imposed when shifting assets into a pooled SNT (see footer for more details).

Before attempting to establish a pooled trust for a beneficiary at age 65 or older, it is imperative to check on recent court decisions regarding transfer penalties in that state.  Due to interpretations of the policy, there could be changes or appeals pending.  In some states, courts have suggested if a recipient can prove the transfer was for fair market value, then the transfer will not be imposed.  We recommend reaching out to a pooled special needs trust to discuss the eligibility based upon the state in which the client resides.

Lastly, a final consideration is how to pay for a client’s future medical expenses through the SNT.  Due to the injury the beneficiary sustained, funds are often also allocated to cover these expenses in worker’s compensation and liability cases.  This may be in the form of a Medicare Set-Aside (MSA), Medical Cost Projection (MCP), Future Medical Allocation (FMA), Life Care Plan (LCP), etc.  Regardless of the allocation type, the future medical component is embedded into a SNT to continue protection of needs-based benefit eligibility.  A professional administrator is often chosen to manage those specific funds to provide medical cost savings, care coordination and support, and to ensure compliance with Medicare.  By coupling administration of future medical funds or a MSA with a SNT, the client will have better protection and an appropriate plan of action to set them up for success for the years ahead.

Have questions about Special Needs Trusts and professional administration? Don’t hesitate to contact our experts!

Special Needs Trusts with Administration: 

Ametros became involved in a liability case with an injured individual receiving Medicaid and SSDI.  The member will become eligible to receive Medicare in the near future; however, the Medicaid benefit needs to be preserved long term since the beneficiary will become a dual eligible beneficiary.  A d4A SNT was created, along with an allocation for Medicare covered items to be held in the MSA and another allocation for non-Medicare covered items.  Ametros collaborated with the SNT to establish two CareGuard accounts, one funded for the MSA, and one funded for the non-Medicare covered items.  Ametros provides ongoing coordination for facility care, as well as applying network discounts for his prescriptions, doctor bills, home modifications and medical equipment.  Ametros also submits MSA reporting annually to ensure MSA compliance.  Meanwhile, the trustee will continue to administer the remaining settlement funds to enhance his quality of life so that the disbursements will not adversely affect his needs-based benefit eligibility. 


SSI and Medicaid disability determinations for eligibility status:

  • 1634 states – The same SSI criteria is also used to determine Medicaid eligibility (“categorical eligibility”).  These states include: AL, AZ, AR, CA, CO, DE, D.C., FL, GA, IN, IA, KY, LA, ME, MD, MA, MI, MS, MT, NJ, NM, NY, NC, PA, RI, SC, SD, TN, TX, VT, WA, WV, WI, WY
  • 209b states – States that have their own Medicaid eligibility criteria.  These states include: CT, HI, IL, MN, MO, NH, ND, OH, OK, VA
  • SSI states – States making their own determinations for SSI recipients. These states include: AK, ID, KS, NE, NV, OR, UT
  • Medically Needy states – A specific category for Medicaid eligibility in states that have chosen to implement this program without regard to how the low-income individual spends their income. These states include: AR, CA, CT, D.C., FL, GA, HI, IL, IA, KS, KY, LA, ME, MD, MA, MI, MN, MT, NE, NH, NJ, NY, NC, ND, OK, OR, PA, RI, TN, UT, VT, VA, WA, WV, WI

Transfer penalties for SNT’s:

  • Currently, the following 16 states and DC do not have penalties for post-64 transfers: AL, AK, CA, DC, DE, FL, IA, IN, ID, KY, MD, MT, OH, RI, TN, WV, and WI.  Twenty-four states DO have penalties for transfers: AR, AZ, GA, HI, LA, MA, ME, MS, NC, ND, NH, NJ, NM, NV, OK, PA, SC, SD, TX, UT, VA, VT, WA, and WY.  The remaining states may or may not have a transfer penalty or the state’s stance is unknown: CO, CT, IL, KS, MI, MN, MO, NE, NY and OR. 


Learn More About Special Needs Trusts

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