The following are questions that many people ask when planning for the future of their adult children or other relatives with disabilities. These questions and answers are also important for families with young special needs children. The answers are phrased in terms of parents’ questions but apply to many other people as well. For convenience, we have used the term “disabled child or relative”.
We are providing selected information and not legal advice. There may be information important to your individual situation that we have not included here. Please consult your own attorney with respect to the choices described below.
What is a Trust?
A trust is a legal arrangement in which one party (individual, group, or organization) holds and manages property for the benefit of another. The person who benefits from the property, the beneficiary, does not own or control it. The person (or persons) or organization that manages and distributes the property, the trustee, does not benefit from it, other than reasonable compensation for services. A trustee has certain legal obligations, described below. There are many different kinds of trusts.
What is a Special Needs or Supplemental Needs Trust?
A Special Needs Trust is a trust designed to shelter the assets of a person under 65 with a disability in order to protect that person’s government benefits related to his or her disability. The assets in a Special Needs Trust can be used for the supplemental needs of the beneficiary, enhancing his or her quality of life, while government programs such as Medical Assistance, SSI, and MH/ID services cover basic support and maintenance. Under federal and state law, the receipt of even a relatively small amount of funds or other assets will often make the disabled person ineligible for benefits unless the funds or assets are placed in a Special Needs Trust.
What can be put into a Trust?
A trust may accept money, stocks, real property, and other assets. What is acceptable for a particular trust may depend on the language of the trust document. It may also depend on decisions made by the trustee. A trustee must be willing and able to accept the responsibility of administering the trust, including the assets within it. For instance, managing property is very different from managing funds. In the individual case, this is a matter to discuss with your own attorney. The Arc Community Trust accepts mostly financial assets but in some circumstances may accept other assets as well.
What are the responsibilities of the Trustee(s)?
The Trustee is required to manage the assets prudently, without personal profit; to follow the instructions of the persons who created the Trust, called the Settlor or Grantor, as set forth in the Trust document; to follow all applicable laws; and to provide regular reports to the Settlor and/or the Beneficiary, the State, and sometimes the courts and other agencies.
In addition, for the purpose of these Trusts, the Trustee is expected to manage the funds well but, unless the Settlor leaves instructions in the Trust document directing otherwise, it is expected that all the assets of the Trust will be spent appropriately during the life of the Beneficiary.
What is The Arc Community Trust of Pennsylvania?
The Arc Community Trust of Pennsylvania is actually a group of trusts, set up to meet the needs of those with disabilities without interfering with their eligibility for government benefits or increasing their financial liability for government services. Although there are many kinds of trusts, those administered by the Arc Community Trust are trusts for special or supplemental needs, that is, those needs beyond general care, maintenance, and support.
The Arc Community Trust is open to persons and families with any kind of disability, including developmental disabilities, chronic illnesses, injuries, and others.
What are the advantages of using The Arc Community Trust of Pennsylvania?
There are many advantages:
You have flexibility in providing for your relative’s future, without risking his or her eligibility for government benefits. If you are planning for yourself and expect to receive funds, you will be able to keep your benefits.
If you use our “Pooled Trust”, setting up a trust is less expensive since most of the work has already been done and the costs may be shared by others. The pooling of funds in our “Pooled Trust” makes it possible to reach more people and to accept smaller amounts of money, so that many more families have access to the advantages that such a trust offers.
The Arc Community Trust deposits trust funds with Fund Managers with which it has made special arrangements for preferred management fees. Thus, the total costs are less than you might experience if a commercial bank were the trustee.
The Arc Community Trust provides continuity that is generally not available with an individual trustee or even with a bank. There is less need to designate a group of potential successor trustees. Individuals may not always be there, but the organization will be.
The Trust is staffed by people who have worked to become familiar with the issues that you and/or your child deal with on a daily basis. They will attempt to give knowledgeable, individual attention and advice, now and later. When possible, they will know you and/or your child personally and will be informed about and connected to local resources.
What kinds of things would be considered special, or supplemental, needs?
Generally, a Special Needs Trust can pay for anything that would not contribute to “direct support.” “Direct support” means food and housing costs (including rent, mortgage, real estate taxes and basic utilities). Examples of special or supplemental needs that a Special Needs Trust can pay for include: non-food grocery items, bus or train passes, pet and pet care, sports equipment, tickets to events (including for a companion), cable TV, medical care not otherwise provided, dental care, computer equipment, furniture, classes and other training and education, trips, counseling, CD’s, furniture and appliances.
Generally, a Beneficiary cannot be given cash. Goods and services must be paid for directly or through a third party.
I have only a small amount of savings. Why should I be interested in The Arc Community Trust?
If you plan to leave anything to your disabled child, you want to make sure it can be used to enhance his or her quality of life. Unlike most banks and trust companies, the Arc Community Trust will accept small deposits, especially in our Pooled Trust. If you set up and fund the trust now, the money can be used immediately for supplemental needs. If you keep the trust unfunded, and leave money for it in your will, the funds will be available for supplemental needs after you die. You and others may add to a Special Needs Trust at any time, as long as the beneficiary is under 65. Check with us to see whether the amount you are considering would be appropriate for The Arc Community Trust.
What will happen if I just leave money to my disabled child in my will?
Unless the amount of money you leave is very small, your child may become ineligible for government benefits until he or she has used up this money for basic necessities. In particular, he or she may become ineligible for Medical Assistance, which covers a wide variety of services. When the money is gone, he or she will have to reapply for benefits, which takes considerable time and paperwork.
Should I just disinherit my disabled child to maintain eligibility for benefits?
You may do so if you choose. However, taking this course alone may deprive you and your family of the opportunity to enhance the quality of your disabled child’s life after your death.
What will happen if I leave money to my other child(ren), with instructions to use some of it for the benefit of the disabled sibling?
For some families this may be a workable arrangement. However, this is what is called precatory language; it requests, but does not require. There is no legal requirement or guarantee that the funds be used as you directed and no supervision or accountability. The sibling may not handle the management and investment of funds adequately; or if the sibling moves away, dies, becomes incapacitated, gets divorced, or goes into debt, the funds may not be used as you intended. Thus your disabled child may be left without resources.
Why should I try to maintain my child’s eligibility for government benefits if I have adequate income to care for him or her?
If you have considerable assets, you may be able to cover all your child’s expenses. However, specialized care can be very costly and use up funds quickly. Residential care is also very expensive. Besides, even if you can pay for these now, you may still want to make arrangements for a time when you can no longer do so.
What is a pooled trust? A payback trust? A common law trust?
There are several kinds of special or supplemental needs trusts used to shelter funds so that the beneficiary remains eligible for government benefits. All these trusts can be established only for the benefit of a disabled individual. In addition to the three terms above, it is important to understand the difference between a self-settled and a third-party trust. A self-settled trust means that the assets come from the beneficiary, for instance from a lawsuit settlement or an inheritance, no matter who actually sets up the trust. By law, self-settled trusts always include a “payback provision” providing that upon the termination of the Trust the Pennsylvania DHS (the Department of Human Services or equivalent) will be reimbursed for Medical Assistance provided to the Trust’s Beneficiary. A third-party trust is funded with the assets of a third person and does not require a payback.
A “pooled trust” may be either self-settled or third-party; that is, the funds may come from either the beneficiary or someone else. It must be created and managed by a non-profit association and can be set up by the disabled individual, or by a parent, grandparent, guardian, or court. The funds in each trust are pooled with others for the purpose of investment and management, but each beneficiary has an individual account and receives individual statements. When the beneficiary dies, the remaining funds become part of the general pool which is administered by The Arc Community Trust for the benefit of other persons with disabilities.
A “payback trust” is also set up for the benefit of a disabled individual under the age of 65, and is self-funded. It may be established by a parent, grandparent, guardian, or judge (court), but not by the disabled individual or beneficiary. At the beneficiary’s death, the remaining funds must be used to pay back DHS for Medical Assistance benefits received. If there is any money left after payback, it may go to whomever the Settlor designated in the Trust document. Since DHS tends to charge at a discount, some trusts are likely to have residuals.
Federal law: Payback trusts and pooled trusts were originally defined and recognized in federal legislation as part of OBRA 93 and are codified as 42 USCA § 1396p(d)(4)(a) [payback] and (c) [pooled]. They are exceptions to the requirement that all funds available to the disabled person be used for care, maintenance, and support. The change in the law allows the funds to be defined as unavailable and covers only persons who meet, or could meet, the federal definition of disability.
Pennsylvania Law: In addition, Pennsylvania legislation has recognized and supports pooled trusts for persons with disabilities. The documents for The Arc Community Trust’s pooled trust have been approved by the regional offices of DHS, Pennsylvania Attorney General, and the Social Security Administration.
A third type of trust sometimes used to preserve entitlements is the “common law special needs trust,” a third-party trust. The courts of Pennsylvania have recognized that these trusts do not constitute available assets (leading to a finding of ineligibility for government benefits) when they are set up properly. The trust’s language must prohibit disbursements which would render a beneficiary ineligible; clearly state the intent that the trust supplement but not supplant governmental benefits and entitlements; perhaps name other potential beneficiaries and remainder beneficiaries; and leave all distributions to the discretion of the trustee. In addition, a common law special needs trust cannot be established with assets of the beneficiary. Since SSA and DHS have somewhat different requirements, proper drafting is essential.
A fourth type of trust treated as a special needs trust is an educational trust. Educational trusts are generally the result of a settlement between parents and a school or school district of a dispute over the education of a child with special needs. The funds in an educational trust may typically be used only for educational purposes and the trust may, but does not necessarily, have a time limit. At the end of the trust, any unused funds are usually returned to the school district.
What are other characteristics of Special Needs Trusts?
All Special Needs Trusts are discretionary trusts. A discretionary trust is a trust which gives the trustee discretion as to whether and when to make distributions. In a discretionary trust, others may make requests or suggestions; but only the trustee can make the decision. The trustee is also not obligated to make regular, required disbursements.
Special Needs Trusts are discretionary to give the trustee the power to prevent a distribution that could be used for food, shelter, or basic support of the beneficiary, and to prevent regular and predictable disbursements that might be considered by the SSA or DHS as available for support, care, and maintenance of the Beneficiary, thereby disqualifying the Beneficiary from important governmental support programs
The basic idea here is that, in order to shelter these funds, you must give up control of them. If someone else has control— that is, the trustee—then the government does not consider them available.
All the trusts in The Arc Community Trust are irrevocable trusts, in order that the funds not be considered available for care, support, and maintenance of the Beneficiary. An irrevocable trust is one that cannot be undone or changed in any material way.
Third-party Special Needs Trusts can be either “inter vivos” or “testamentary.“ An inter vivos trust is a trust set up and funded during the life of the Settlor. In contrast, a testamentary trust is one established in a will. The Arc Community Trust accepts both.
Who decides how the funds in my Trust are to be spent?
You can—and should— provide guidelines and suggestions in the trust document and any supporting material, but the decision is always up to the trustee(s). That is, the trustees have sole discretion, as explained above.
Can a Beneficiary make requests, can others involved with him or her?
Certainly. In some trusts, you may make a family member a co-trustee or adviser. As an adviser, the family member would not have the power or responsibility of a trustee, but could have a substantial influence on how the funds are used. Many relatives would prefer such a role, with the actual responsibilities falling to outsiders.
You may also include in your trust document a list of those authorized, including the beneficiary, if competent, to make requests.
Who will keep track of my account?
The staff of the Trust will provide you and/or your beneficiary with regular reports. You may also call and ask for information at any time. In addition, the Trust may be required to provide regular reports for your protection, for instance, to government agencies.
Must I put money into the Trust now?
No, you may leave your trust unfunded. This means that you set up the trust and identify the designated sources of the trust property and the events that would actually bring this property into the trust. Usually this is a will but could also be an insurance settlement or other inheritance or payment. If you decide on a testamentary trust, you will need to have a will that is consistent with your trust document, or make the trust part of the will.
Does the Trust pay taxes?
Many trusts must file tax returns and are subject to taxes; however, since the purpose of these trusts is to use the funds for the beneficiaries, many have no interest or dividends to tax. The staff and their accountants handle tax matters for the trust accounts.
Can I leave real property to the trust?
The Trust may accept real property, as long as you can make sure that it is in reasonably good condition and that there are also funds for maintenance of the property. Sometimes parents want to leave the family house to the trust in order for the beneficiary to continue to live there. In such cases the beneficiary’s government benefits may cover much of the costs of living there but will not be adequate for general maintenance and major repairs such as a roof. If there are funds available to manage and maintain the property, the Trust will do so as long as it can be done. This is a matter to work out with your attorney and will take considerable planning.
Can other people contribute to the Trust?
Yes, you and others, at any time while the beneficiary is under 65, subject to the same conditions as the original Settlor(s).
What will my trust cost?
In addition to a small setup fee, administrative fees are a percentage of the account. Please see the fee sheet for specific information.
What if there is money left in my Trust when the beneficiary dies?
If it is part of the Arc Community Trust’s pooled trust, the remaining funds will become part of the pool and be used to help other persons with disabilities.
If the Trust is an individual Special Needs Trust with a payback provision, the remaining funds will be used to pay back the state for Medical Assistance benefits paid on behalf of the Beneficiary. However, if the amount owed is large, the State will take only what is left in the Trust and cannot collect more. If there is money remaining in the Trust after the State has been paid, it may be left to anyone designated in the trust document.
My child is very young. Why should I think about these issues now?
If you should die or become disabled, those who care for your child(ren) will need guidelines. If you have minor children, you should make plans for all of them. In addition, your estate should be managed in the way that promotes the best interests of your disabled child, minor or adult.
Developing a Letter of Intent and an appropriate trust now may increase the likelihood of a smooth transition and good care for your child. The best time to plan is before you really need to do so. You can always make some changes later. If something should happen to you and there is no plan for your child, the courts will make one. And how well does the court system know your child?
Will I still need an attorney?
Yes. There are many aspects to estate planning, and you will want someone who has both expertise and patience. The legal expenses are likely to be less because The Arc Community Trust has already developed and will make available several useful documents. We will work with your attorney, or, if you do not have one, refer you to several in your area.
Who will watch over my money and supervise the Trust? Are there any protections?
Since trustees are held to a very high standard of responsibility, there are many protections. For instance, the Investment Committee of The Arc Community Trust Board oversee the selection of professional Fund Managers who will invest the funds held in trust. For the pool, the Trust will be required to send an annual report to the Pennsylvania Attorney General and to show that funds used were for the benefit of the named beneficiary. Institutional settlors, such as school districts, and any courts involved, may require regular accounting’s. The courts may also require that certain expenditures be approved. The members of the Board of Directors of The Arc Community Trust are responsible for the operations of the Trusts and take these responsibilities very seriously. The Trust and its staff and Board also carry certain kinds of insurance. Regular reports allow settlors and beneficiaries to keep track of the funds in the relevant account and to ask any questions that they may have.