Supplemental (Special) Needs Trusts: Planning for the Disabled and Sheltering Personal Injury Awards

Supplemental (Special) Needs Trusts: Planning for the Disabled and Sheltering Personal Injury Awards

By Donald D. Vanarelli, Esq.

 

Supplemental (Special) Needs Trust:

A trust designed to supplement, and not to supplant, impair or diminish, public benefits a beneficiary is receiving, or may in the future be receiving. Designed to (1) protect the trust corpus in the event that the beneficiary is, or becomes, eligible for public benefits and (2) protect the beneficiary’s eligibility for benefits, which might otherwise be in jeopardy by an outright distribution of the trust corpus.

Types of SNTs:
  • Inter vivos (established during the settlor’s lifetime):  Self-settled: a SNT established using the beneficiary’s own funds
    Third Party: a SNT established using funds of a non-beneficiary third party
  • Testamentary:
    A third-party trust established under the testator’s Last Will and Testament. Also called “Supplemental Benefits Trust”
Applicable Law:
  • 42 U.S.C. §1396p(d)(4)(a), as amended on August 10, 1993 by the Omnibus Budget Reconciliation Act of 1993, Public Law No. 103-66:
    recognizes the use of special needs trusts to ensure that assets of a disabled individual are not exploited or wasted, and to preserve that disabled individual’s eligibility for Medicaid and other needs-based public benefits.
  • June 5, 1996 HCFA Memorandum, “Treating Disability Trusts under Transfer of Assets, Trust Estate Recovery, and Third Party Liability Rules”:
    HCFA confirms to all state Medicaid directors that special needs trusts, including those established by a court on behalf of or at the behest of an individual, are covered by the Medicaid trust rules, including the provisions exempting a trust from the general rules that cause the trust to be considered as available resources.
  • N.J.S.A. 3B:11-36 et seq.
  • N.J.A.C. 10:71-4.11 (g)(1)(i-xviii).
State Requirements for Establishment of SNT:

A special needs trust may be established if the following criteria, inter alia, are met:

  1. The trust is irrevocable.
  2. The trust is established for a person under 65 years of age.
  3. The individual for whom the trust is established is disabled within the definition of 42 U.S.C.1382c(a)(3).
  4. The trust is established by a parent, grandparent, legal guardian of the individual, or a court.
  5. The purpose of the trust is to use the trust assets to supplement, rather than supplant, public benefits.
  6. The trust contains a provision that, upon the death of the beneficiary, any state which has provided medical payments under its Medicaid program for the disabled individual is entitled to be reimbursed from the remaining assets of the trust. (Applies to self-settled SNTs only.)
  7. The trust states that the trustee shall fully comply with all State laws, including the Prudent Investor Act.

N.J.S.A. 3B:11-36 et seq.; N.J.A.C. 10:71-4.11 (g)(1)(i-xviii).

IMPORTANT CONSIDERATIONS:

Establishing a SNT:

A SNT may be established by a parent, grandparent, legal guardian of the individual, or a court.

Consider applying to the Court:

  1. To establish a SNT by a guardian on behalf of a disabled person under age 65.
  2. For reformation of a testator’s Last Will and Testament, in order to effectuate the probable intent of the testator.
  3. For reformation of an existing (but non-complying) trust under a testator’s Last Will and Testament, in order to effectuate the probable intent of the testator.
  4. To establish a SNT by a proposed trustee, to hold in trust the proceeds from a person injury award (which proceeds are held in trust by the attorney for the plaintiff or are otherwise inaccessible to the beneficiary because of his disability). Under federal and state law, any Medicaid lien existing at the time the special needs trust is created must be repaid before the trust may be funded with the proceeds of a personal injury settlement.
The “Payback Provision”:

Pursuant to 42 U.S.C. 1396p(d)(4)(a), an individual may remain eligible for such benefits under the “Payback Trust” provision if he or she has:

A trust containing the assets of an individual under age 65 who is disabled…and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.

Id. (emphasis supplied). The highlighted language supports the conclusion that there is no payback provision required for a third-party SNT (or a Testamentary SNT).

Trust Administration:

Distributions from a SNT could affect the beneficiary’s public benefit amount, depending on the form and amount of the distribution. End of article icon.

 

For additional information regarding Planning for the Disabled and Sheltering Personal Injury Awards, call us at 908-232-7400 or click here to contact us online.