Which Trust Will Work For You and Your Loved One?
Special Needs Trusts
A Special Needs Trust is a very specific kind of trust that offers the option of keeping someone eligible for public benefit programs while also receiving the benefit of a supplemental fund. This supplemental fund can pay for an entire range of services and goods that are not covered by public programs.
Special Needs Trusts can be established with funds that belong to the person who is receiving public benefit programs or with funds that belong to someone else such as one or more family members. Different rules will apply depending on whose funds are used to establish the Trust, but the person receiving public benefits will still receive the benefits from the Trust no matter which rules apply, so long as the Trust’s rules are followed.
There are several kinds of Special Needs Trusts with different names, but they all share the common trait of maintaining eligibility for asset-tested public benefit programs. The names that are used to describe these different kinds of Special Needs Trusts can be confusing, but they do not need to be. Just keep in mind that there are only three different kinds of Special Needs Trusts, and they are not confusing if explained in plain English.
Self-Settled Special Needs Trusts come in two varieties, non-Pooled and Pooled. A non-Pooled Special Needs Trust (also known as a Payback Trust) is established for one Trust beneficiary, and the Trustee can be anyone who is qualified to act as Trustee. This is the kind of Trust most people refer to when they use the term Special Needs Trust. However, a lot of the confusion about Special Needs Trusts comes from the fact that many people use the term generically without a clear understanding of the differences between Trusts. It is ok to use the term generically, but it is also important to have a good understanding so you do not perpetuate any confusion.
A Payback Trust is sometimes referred to as a “stand alone trust” since each trust is individually drafted and will be received and reviewed separately by the government. If, for whatever reason, an individual is already ineligible, the delay caused by the necessary preparation and approval times can be quite costly. Each Payback trust will need a trustee which could be a family member, a for-profit corporate fiduciary, or a non-profit corporate fiduciary.
Requirements for a Payback Trust
- It is for the benefit of an individual with disabilities under 65 years of age.
- The beneficiary is disabled as defined in 42 USC 1382 c(a)(3).
- The trust is established by a parent, grandparent, legal guardian or court.
- At the beneficiary’s death, any residual funds are first used to pay back the State or Commonwealth for any Medical Assistance benefits received by the Beneficiary.
Other Notes about a Payback Trust:
- This trust can be self-funded and now also self-created. The beneficiary of a Payback Trust can now serve as a settlor.
- It can be self-funded since funds that the individual has received can be placed in the trust and they no longer render the individual ineligible.
- It cannot be self-created since the individual is not authorized by statute to establish a trust. If the individual has no guardian, parents, or grandparents, a court would be needed to establish the trust.
There is a possibility, usually remote, that after the beneficiary’s death, the Commonwealth can be repaid and funds will remain to be disbursed. Obviously, the longer the beneficiary lives and the greater the Medical Assistance benefits paid in the beneficiary’s behalf, the possibility of any funds remaining for disbursement are proportionally reduced.
Third Party Funded SNT
The Third Party Funded Trust is a trust which is created and funded by someone other than the individual with a disability, such as a parent, grandparent, or another loved one. By contrast, Trusts that are funded by the Trust beneficiary are often referred to as Self-Settled Special Needs Trusts to indicate that the assets funding the Trust originally belonged to the Trust beneficiary.
This type of trust gives the trustee almost total discretion to spend or not spend on the beneficiary’s needs, except that the trustee is always directed not to distribute assets in any way that reduces the beneficiary’s government benefits. In effect, funds cannot be spent on support items: basic food, basic housing, and basic medicine and medical care. Due to the discretion vested in the trustee, choice of the trustee is critically important. The trust walks the fine line of supplementing government supports for the individual without creating a disqualifying distribution of an asset for the individual.
There are some very basic differences between this trust and the two self-funded trusts:
- The Third Party Funded Trust permit the Settlor, the individual establishing the trust, to direct all residual funds at the time of the beneficiary’s death without any pay back to the government.
- The Third Party Funded Trust permits, perhaps even encourages, more than one concurrent beneficiary. The Third Party Funded Trust can use a family member or corporate fiduciary to serve as the trustee. Each trust is established and maintained individually and must be approved individually by the government.
It is important to remember that this type of trust cannot be self-funded. Once the individual is entitled to receive assets, a Third Party Trust cannot be established. A parent can set up a Third Party Funded Trust in his or her will and leave assets to the trust for the benefit of the beneficiary. If the parent leaves assets directly to the individual, a Third Party Funded Trust cannot be established since the individual would then already be entitled to the assets.
A Third Party Funded Trust is a very effective Supplemental Needs Trust option that requires advanced planning.
A Pooled Special Needs Trust is also established for one Trust beneficiary, but the Trustee cannot just be anyone who is qualified to act as Trustee. By contrast, Pooled Trusts must be established and administered by a non-profit association.
A Pooled Trust is an example of a “first-party” trust in that it can be established by the individual with a disability. The name Pooled Trust is used since the funds deposited are pooled for investment purposes, but are accounted for separately by individual.
Requirements for a Pooled Trust:
- The pooled trust must be established and maintained by a non-profit organization.
- Assets are pooled for investment but accounted for separately.
- The account is for the benefit of an individual with a disability as defined in
42 USC1382 c(a)(3).
- The account is established by a parent, grandparent, guardian, court or the individual.
- At the time of the beneficiary’s death, to the extent that funds are not retained by the trust, remaining funds are first used to pay back the State or Commonwealth for the Medical Assistance received by the beneficiary.
Other Notes about a Pooled Trust:
- This trust can be self-created and self-funded.
- Because there is no “look-back” period on a Pooled Trust, any funds received by the individual, or to which the individual is already entitled, can be deposited into a Pooled Trust and will no longer render the individual ineligible.
- For-profit corporate fiduciaries and family members cannot serve as trustees. Only non-profit associations can act as trustees for Pooled Trusts.
- A Pooled Trust is established using a Social Security Administration pre-approved form and does not require separate court approval.
In addition to administering pooled and non-pooled special needs trusts for people with disabilities, THE ARC COMMUNITY TRUST OF PENNSYVANIA (“ACT”) administers educational special needs trusts. Educational trusts are trusts which typically arise out of the settlement of disputes between parents and school districts over whether the school district has provided adequate “free appropriate public education” (“FAPE”) for a student with disabilities, as required by the Individuals with Disabilities Education Act (“IDEA”) or whether the school district has properly followed an Individualized Education Plan (“IEP”).
Educational trusts are settled either by the school district or by the parents of the student-beneficiary and funded as provided in the settlement agreement. ACT’s administration of an educational trust is guided by two documents: the settlement agreement between the parents and the school district and a trust agreement between ACT and either the parents or the school district, depending on who is settling the trust. The settlement agreement, which comes first, is negotiated by lawyers for the parents and the school district. The trust agreement is then drafted by the lawyer for either the parents or the school district. Ideally, the terms of the two documents mirror each other. Although technically bound only by the trust agreement, ACT refers to both documents when administering educational trusts so as to avoid unnecessary disputes between the parents and the school district.
When administering an educational special needs trust, ACT provides the following services:
- Investment of the educational trust’s funds with experienced investment managers. ACT consults with the investment managers concerning investment strategies and pays the fees of the investment manager out of ACT’s own trust fees.
- Preparation and filing of tax returns on behalf of the educational trust when required. The cost of preparation and filing and any tax due are paid from funds in the educational trust.
- Periodic reporting to the school district if required by the trust agreement or the settlement agreement.
- Payment from the educational trust of bills for tutoring and other services, educational materials and other items which are allowed purchases under the trust agreement. Please see the memorandum entitled “Frequently Asked Questions About Educational Trusts.”
- ACT’s trust administrators consult with parents and students to help them determine what is permitted under the trust agreement and what is the most efficient and effective way to meet the needs of the student.
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