Dolores M. Coulter

Attorney at Law

8341 Office Park Dr. Ste C

Grand Blanc, MI 48439

Phone:  (810) 603-0801

 Email: coulterdm@sbcglobal.net

Special Needs Trusts

Dolores M. Coulter © September 2008

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Q:      I have an adult niece who is disabled and lives with my sister and her husband.  They don’t have a lot of money and I would like to leave some money in my will to help take care of my niece.  She receives SSI and Medicaid. I don’t want to do anything that would cause her to lose those benefits.

Providing some financial security for a family member with a disability adds additional complications to the estate planning process.  In some cases the disability is such that the family member is unable to manage his/her money or property and needs third-party assistance in financial matters.  In other cases the individual may have physical disabilities and be capable of managing his/her own money or property but the receipt of a lump sum inheritance would result in a loss of Medicaid, SSI, or other government benefits.  In some cases the individual is able to function well in a supportive living arrangement, but would be vulnerable to financial exploitation by unscrupulous third parties, whether they be a “new best friend”, a family member, caregiver, or a consumer scam promoter.

If you would like to provide for your niece by leaving some money to be used for her care after your death you can includes provisions in your will to create a “special needs trust.”  These trusts are also called “amenities trusts” or “supplemental needs trusts”.  The purpose of a special needs trust is to preserve a sum of money to be used  to pay for a wide range of services that will improve the quality of life for a person with a disability without jeopardizing his/her eligibility for Medicaid, SSI, or other needs-based government benefits.  Your will would include provisions that create a trust for the benefit of your niece and would direct that a certain amount of money or a percentage of your estate be transferred to the trustee of that trust.  You could also provide for the funding of the trust by naming the trust as beneficiary of a life insurance policy, annuity policy, bank account or brokerage account.  Your will would contain all of the typical provisions involved in creating a trust, such as the name of the person you want to act as trustee, the names of successors trustees who would take over in the event the initial trustee is unable or unwilling to serve, provisions that protect the money in the trust from creditors, requirements for periodic accountings, and directions on how to distribute any money that is remaining in the trust after your niece’s death.  

 The language in the trust that describes how the trustee should spend the money on behalf of your niece is very important.  If the language is not carefully drafted it could disqualify your niece from Medicaid, SSI, and other needs-based benefits.  In order to avoid this problem the trust must be written as a purely discretionary trust.  This means that the trustee is given sole discretion in deciding how to spend the money for your niece’s welfare.  If the language in the trust is written to require the trustee to spend the money in a certain way, for example by requiring the trustee to maintain the person’s customary standard of living or requiring the trustee to spend the income from the trust for the support of the individual, then some or all of the money in the trust would be considered an “available” and “countable” asset for your niece.  Needs-based programs such as Medicaid and SSI have strict limits on the amount of countable assets that a person can own and still be eligible.  An individual who is not married is ineligible for Medicaid and SSI if his/her countable assets exceed $2,000.00.  If the Social Security Administration (which administers the SSI program) or the state Department of Health and Human Services (which administers the Medicaid program) decides that the trust is an available and countable asset, then the beneficiary would not be eligible for those benefits until the trust assets were reduced to an amount below $2,000.00. 

 The trustee of a special needs trust will typically pay for goods and services provided to the beneficiary by paying the third party provider directly from the trust.  If the trustee were to pay cash directly to the beneficiary it would be treated as income to the beneficiary. The trustee must keep in mind that there are differences in the SSI and Medicaid rules, particularly as they relate to income.  The SSI rules regarding distributions from a special needs trust are more restrictive that the Medicaid rules.  For example if the trustee pays the beneficiary’s rent directly to the landlord, this would  reduce the beneficiary’s SSI check by a certain amount but it would not affect Medicaid eligibility.

Probably the most important decision in creating a special needs trust is deciding who should be the trustee.  Obviously you want to name someone whom you can trust to act solely in the best interests of your niece.  You also need to keep in mind that acting as a trustee is a serious responsibility that can be time-consuming and difficult.  The trustee has to decide how to invest the trust assets and must keep complete and accurate records.  The trust is considered a separate legal entity and the trustee is responsible for filing the proper tax returns for the trust.  The trustee may also have to deal with other family members who may not always agree with how the trustee is managing the trust. 

Instead of creating a special needs trust through your will you could create the trust during your lifetime.  You could then make arrangements to fund the trust in a variety of ways: for example you could name the trust as beneficiary of a life insurance policy, annuity policy, bank account or brokerage account.  You could name the trust as a beneficiary in your will.  You could also make direct gifts to the trust during our lifetime.  By setting up the trust during your lifetime other family members could also make gifts or beneficiary designations to the trust in the same manner. 

By creating a special needs trust for your niece you can help to improve her quality of life and allow her to enjoy some of the “extras” that she could not otherwise afford from her SSI benefit.  You will also be providing some peace of mind for her parents by helping to assure some financial security for their daughter.