The term “Special Needs Trust” is often used as a generic reference for several different types of trusts. While these trusts have some differences, they all allow someone who receives means-tested public assistance benefits like Supplemental Security Income (SSI) and Medicaid to continue receiving benefits while having a trust. The value of receiving SSI and Medicaid while having any one of these trusts cannot be overstated because trusts normally preclude someone from receiving SSI and Medicaid.
Despite its generic use, the term ‘Special Needs Trust’ (SNT) refers to the specific type of self-settled trust that is authorized by the Social Security Act at §1917(d)(4)(A) and in Federal law at 42 U.S.C. §1396p(d)(4)(A). The term, “self-settled” simply means that the money or other property funding the SNT originally belonged to the trust beneficiary. As explained on our Special Needs Trust page, the source of funding can have a significant impact on how a trust is administered.
Must Comply with Controlling Law
To create a valid SNT that protects someone’s SSI and Medicaid eligibility, the trust must be set up to comply with the law that authorizes SNTs. In other words, the trust document must contain provisions that mirror the provisions found in Federal law. In addition to the trust mirroring the provisions found in Federal law, these provisions must actually be satisfied at the time the trust is created. Accordingly, the provisions found in subparagraph (A) of §1396p(d)(4) require a SNT to:
- contain the assets of an individual under age 65;
- be established for an individual who has a disability as defined in U.S.C. 42 §1382c(a)(3);
- be established for the benefit of the individual;
- be established by the individual’s parent, grandparent, legal guardian, or a court; and,
- reimburse the State for all of the medical assistance paid on behalf of the individual from any remaining assets upon the individual’s death.
As part of the process of determining whether someone is eligible for SSI benefits, the Social Security Administration (SSA) makes a formal determination that the person has a disability. According to U.S.C. 42 §1382c(a)(3), someone will be found to have a disability if he or she:
is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve months.
If someone is already receiving SSI at the time his or her SNT is established, the requirement to establish a SNT for an individual with a disability will be satisfied because the SSA will have already made a determination of disability. On the other hand, if someone has a SSI application pending or is applying for SSI at the time the SNT is established, disability must be assumed for purposes of establishing the SNT so that the application can be successful. If the SNT is not established, the applicant will not be eligible for SSI when the SSA later determines that the individual has a disability because they will be over their asset limit. By establishing the SNT during the application process, the assets will be excluded and the individual can be assured of SSI eligibility once the SSA determines they have a disability.
For people who apply directly for Medicaid benefits without SSI, the individual States have an Office, a Department, or a Division of Disability Determinations. In addition to contracting with the SSA to make disability determinations, these Departments or Divisions also have medical review teams who use state regulations to determine eligibility for medical assistance under a variety of state Medicaid programs. Regarding these programs, Medicaid has two major divisions among its many programs: non-SSI related Medicaid and SSI related Medicaid. Because the SSI related Medicaid programs are grounded on the SSI rules, which require disability, eligibility for SSI related Medicaid will generally satisfy the disability requirement for most Medicaid beneficiaries who want to establish a SNT.
Upon an initial reading, the language in the Federal statute seems to be simple and straightforward. It simply requires that the individual with a disability be the beneficiary of the SNT. However, the policy manual used to process claims by employees at the SSA adds an additional wrinkle to this simple and straightforward language. This policy manual is called the Policy Operations Manual System (POMS), and it is the official reference used to interpret Federal law and regulations regarding SSI and all other Social Security Benefits.
While the POMS do not have the force of law, courts generally give deference to an agency interpretation of its own regulations provided the interpretation is reasonable and not arbitrary. This means that a SNT must comply with the POMS in addition to the plain language of the Federal statute. From a practical perspective, complying with the POMS is necessary so that the SNT will pass review when reviewed by the SSA. Employees at the SSA will not be swayed by arguments that any particular section of the POMS fails to comport with Federal law or regulations. The options are to comply with the POMS or be denied benefits and be prepared to begin a lengthy appeals process.
The wrinkle added by the POMS is found in two different sections. In the first section, which is sub-paragraph B.1.e. of SI 01120.203 Exceptions to Counting Trusts Established on or after 1/1/00, a trust will only be treated as a SNT if the trust has been established, “for the benefit of the disabled individual,” as interpreted by the SSA. This same subsection goes on to explain that the SSA, “has interpreted this provision to require that the trust be for the sole benefit of the individual, as described in SI 01120.201F.2. (emphasis added).”
Turning to SI 01120.201, Trusts established with the assets of an individual on or after 1/1/00, sub-paragraph a. of F.2. instructs SSA employees to consider a trust to be, “established for the sole benefit of an individual if the trust benefits no one but that individual, whether at the time the trust is established or at any time for the remainder of the individual’s life” (emphasis not added). While this interpretation adds a requirement that is not plainly stated in Federal law, or generally supported by the trust law of most States, SI 01120.201 goes on to provide some exceptions to this strict sole benefit requirement. For example, any payments a SNT makes to third parties will not violate the sole benefit rule if the payment is for goods or services received by the trust beneficiary. The SNT may also pay reasonable trustee fees, investment fees, and other fees necessary for administering the trust. Other exceptions are beyond the scope of this page but are explained on our page How a Special Needs Trust Can be Used.
This discussion about the sole benefit rule has been based on the POMS, which are used to determine eligibility for SSI. However, it would be a mistake to think that the sole benefit rule only applies to SSI. Because the rules for SSI related Medicaid are grounded in the rules for SSI, the sole benefit requirement as interpreted by the SSA has been incorporated into all of the various Medicaid policy manuals used by the individual States. This means that State Medicaid Agencies will apply the same interpretation of the sole benefit requirement when determining someone’s Medicaid eligibility.
Be Established by the Individual’s Parent, Grandparent, Legal Guardian, or a Court
While this Federal provision is simple enough, it seems to be lacking in forethought. For example, under the well-established trust law of all States, the individual who initially funds a trust is always the same individual who establishes the trust. Here, however, the individual whose assets are funding the trust is notably absent from the list of who can establish a SNT. The SNT can only be established by one or both of the individual parents, grandparents, a legal guardian, or a court.
If a parent or grandparent is available, this provision of the Federal law does not present a problem although it can often be disconcerting when adult individuals are forced to rely on family members when they are fully competent with the ability to act on their own. Related to this issue is when a fully competent adult individual does not have a living or available parent or grandparent. Because such a fully competent individual does not have or need a legal guardian, the only remaining option is to have the SNT established by a court. This can be a workable solution when there is a court with jurisdiction, but this will create additional challenges when no court has jurisdiction. Examples of when there would be a court with jurisdiction would be if the individual is the beneficiary of an estate being probated or is the claimant in a person injury action after a complaint has been filed with the court.
This situation will change if a Bill passes that was introduced by U.S. Representative Glenn Thompson on May 23, 2013. Known as the Special Needs Trust Fairness Act of 2013, H.R. 2123 seeks to amend the Social Security Act by adding “individual” to the current list of who can establish a SNT. A Senate companion Bill, S. 1692, was introduced on November 7, 2013 with Senator Bill Nelson of Florida as its sponsor.
One last example of the challenges that can arise in establishing a SNT is when a parent is also the legal guardian of their child. Generally, a parent can become a legal guardian for one of two reasons.
First, a parent could become the legal guardian of an adult child in those situations where the adult child is unable to provide self-care. This can occur if the child grew up with a serious developmental disability or if the adult child suffered an illness or injury that seriously affected their capacity. Second, a parent could also become the legal guardian of a minor child in some circumstances.
Parents are the natural guardians of their children during minority, which means they have both the right and the obligation to make all decisions about child rearing. However, the majority of States place limits or other restrictions on the amount of money a parent may receive on behalf of their minor children. If a minor child will be receiving an amount of money that exceeds this limit, a formal guardianship of the property must be established through State court for the protection of the child’s property.
In any situation where a parent is appointed guardian, the parent’s role as legal guardian takes precedent over the natural parent and child relationship when it comes to establishing a SNT. In other words, the parent will be required to establish the SNT in his or her capacity of legal guardian and not in the capacity of parent. While this may seem like a meaningless distinction, it means that the parent will need to seek court approval to establish the SNT as legal guardian in most States. This is because the majority of States do not allow guardians to establish trusts without specific authority, or an order, from the court having jurisdiction over the guardianship.
Reimburse the State for all Medical Assistance
Of all the Federal provisions regarding SNTs, most people express their strongest reaction to the requirement of reimbursing the State for all of the medical benefits provided to the individual over the individual’s lifetime. If more than one State provided Medicaid benefits, each State must receive its proportional share of the remaining trust assets. While this can seem like a harsh requirement, it is actually sound public policy that balances the personal interests of the individual and the public interests of society at large.
What puts this policy in perspective for most people is to realize that nothing in Federal law or the POMS requires any formal protection of the State’s reimbursement rights. In other words, it is legal and perfectly ethical to use all of the assets in a SNT during the individual beneficiary’s lifetime. The only caveat to this statement is that the SNT must be administered in a manner that is consistent with the sole benefit rule. The sole benefit rule insures that the SNT assets will be used only for the individual trust beneficiary and not for the benefit of friends or family members. However, most family members express appreciation for this restriction when they understand how it works because they know it will protect the interests of the individual SNT beneficiary who has a disability.
While all of the assets in a SNT can be used during the trust beneficiary’s lifetime, the restrictions that apply upon a beneficiary’s death can produce a very harsh result if not planned for appropriately. For example, paying for a beneficiary’s pre-need funeral services is a prudent expense that will also comply with the sole benefit rule. However, if these services are not pre-planned and paid for in advance, the funeral expenses of a beneficiary cannot be paid for after the beneficiary’s death until the State has first been reimbursed. If it turns out that the State’s claim is larger than the remaining SNT assets, then the SNT will not be able to pay for funeral expenses at all. Even if the State’s claim is less than the remaining SNT assets, the ensuing time it takes to determine the State’s claim with certainty will create an unacceptably long waiting period before funeral expenses can be paid.
Upon a beneficiary’s death, the POMS clearly set out what it characterizes as allowable and prohibited expenses in sub-paragraph 3 of SI 01120.203B. Any State and Federal taxes that the SNT may owe because of the beneficiary’s death can be paid. Also, any reasonable administration fees for closing the SNT can be paid such as accountings and filing fees. However, this section of the POMS specifically lists the following payments as prohibited expenses prior to reimbursement to the State:
- funeral expenses;
- the beneficiary’s taxes;
- third party debt;
- inheritance taxes owed by residual beneficiaries;
- distributions to residual beneficiaries.
It is obviously important to understand that there are allowable and prohibited expenses upon the death of a SNT beneficiary so that a harsh result can be avoided. Although these prohibited expenses may be the most dramatic Federal provision, it is equally important to have an understanding or appreciation of how all these Federal provisions interact so that a SNT can be truly maximized for the beneficiary’s benefit. In addition to having good legal representation, it is also crucial to have an experienced Trustee who understands how all of the SSI and Medicaid rules operate. Good legal representation can help with the initial decision to establish a SNT, and an experienced Trustee can help guide beneficiaries and their family members to maximize the greatest possible benefit from the SNT while protecting the beneficiary’s public assistance benefits.