Persons with disabilities and their families face significant challenges when designing an estate plan. Attorneys must be able to construct an estate plan to ensure that assets will be received and used for the disabled person as intended without jeopardizing governmental benefits.
The attorneys at Herr Potts and Potts help families navigate through the complex area of estate planning. We have served southeast Pennsylvania residents for decades and would work tirelessly to serve you. To schedule a confidential consultation, call (610) 254-0114 or contact us online.
What are “Special Needs Trusts”
A trust is a relationship where one party, the grantor or trustor, gives another party, the trustee, the rights to property or assets for the benefit of a third party, a beneficiary. A special needs trust is created to store financial resources for a disabled person under the age of 65 who receives, or may receive, medical assistance or supplement security income (SSI).
For a disabled person to be eligible for medical assistance or SSI, he or she can own no more than $2,000 in assets. There are certain substantial funds which must be placed into a special needs trust if a disabled person wishes to remain eligible for medical assistance and SSI, such as:
- Sizable proceeds from a lawsuit
- Life insurance proceeds
- Divorce settlement
By employing a special needs trust, the disabled beneficiary can continue receiving governmental benefits (Supplemental Security Income, Medicaid, and other services) even though assets are over the eligibility limit.
Assets in a special needs trust can be used for such purposes as
- Funeral planning
- Medical and dental care not otherwise covered by public assistance or private insurance,
- Psychiatric / psychological / recreational / occupational therapy,
- Home care aides,
- furnishings, and quality of life enhancements.
However, funds cannot be directed to food, housing, or clothing needs unless the governmental benefits are insufficient to meet those needs
Types of Special Needs Trusts
Generally, there are three types of special needs trusts, they consist of:
- Common law discretionary trust
- OBRA-93 payback trust
- Pooled trust
Discretionary trusts are described as common law because they derive from a series of court decisions instead of a statute. Common law discretionary trusts are usually employed when a third party is giving a gift to a person with special needs, such as money. Typically, there are four requirements to establish a common law discretionary trust:
- The trust must clearly state that funds placed in the trust are meant to complement and not replace public benefits.
- The trustee must consider public benefits prior to distribution of any income or principal.
- The trust must be irrevocable, meaning once funds from third parties are placed into the trust, they cannot be removed later by the third party.
- The trustee must have absolute discretion to pay, or refuse to pay, the income or principal from the trust to the special needs beneficiary.
One major advantage held by common law discretionary trusts is that they do not need to be registered with or approved by the Pennsylvania Department of Public Welfare. Additionally, funds in the trust do not have to be used to pay back the Commonwealth for medical assistance payments upon the special needs beneficiary’s death.
OBRA-93 payback trusts arise out of a federal statute named the Omnibus Reconciliation Act of 1993. Payback trusts are used when the assets funding the trust come directly from the child with special needs. For example, if a disabled beneficiary receives a large settlement from a personal injury case they should transfer it to the trust to avoid losing their public benefits. There are several requirements for a payback trust, such as:
- The trust must be irrevocable.
- The disabled person must be the only beneficiary and they must be under the age of 65
- The trust can only be created by a parent, grandparent, guardian, or a court.
- The trustee must have unconstrained discretion to pay or refuse to pay resources of the trust to the disabled beneficiary.
Unlike common law discretionary trusts, payback trusts must be registered with and approved by the Department of Public Welfare, who then oversee the administration of the trust. Additionally, after the death of the beneficiary, any amounts paid to the beneficiary for medical assistance are required to be repaid to the Commonwealth with funds from the payback trust.
A pooled trust is authorized by federal Medicaid and Supplemental Security Income (SSI) laws. A pooled trust is administered by a non-profit agency. The funds transferred into the trust can be from a third party or the special needs beneficiary. Funds transferred to the trust are then pooled together with monies from other similar beneficiaries.
Like a discretionary trust, a pooled trust requires no filings with the Department of Public Welfare; nor is there a need for the payback of medical assistance payments. A distinction of pooled trusts is that, at the death of the beneficiary, all funds remain in the trust and may be used to pay other beneficiaries of the pooled trust.
How to Create a Special Needs Trust in Pennsylvania
There are certain things you need to think about before creating a special needs trust. Things such as:
- Determining the type of trust that is appropriate for your child
- Choosing a dependable trustee
- Choosing an advocate who understands the beneficiary’s needs
This is not an exhaustive list of ideas to ponder before creating a special needs trust. Creating a special needs trust is an intricate process, failure to draft a sound plan can result in many complications for a disabled beneficiary. If you are considering making a special needs trust, you should consult with an experienced lawyer.
Our Estate Planning Attorneys Can Help
If you are the parent or guardian of a special needs child, you should consult with a lawyer about creating a special needs trust to protect their best interests.
Our lawyers serve communities in southeastern Pennsylvania and enable our clients to plan for the unique physical, mental, and financial requirements of a family member with special needs. We assist our clients in structuring their succession plan in a manner that will avoid jeopardizing government benefits which their loved one may be receiving. For a confidential consultation, call us at (610) 254-0114.
Recent Representation Matters:
- Established a Third Party Special Needs Trust for a couple and allowed grandparent to include the trust in her Will to ensure that the disabled individual would not receive any direct inheritance that would affect government benefits.
- Drafted a Payback Trust to ensure disabled individual would continue to be eligible for government benefits despite receiving a large sum from a trust.
- Helped client establish an ABLE account so she could continue to work and save money while continuing to receive government benefits.
- Helped clients argue for continued medical assistance for their son when the local county assistance office terminated eligibility.
- Drafted Powers of Attorney for disabled individual to sign so that his parents and then his brother would be able to help him make decisions in the future.