I am often asked to draft or review a First Party Special Needs Trust for a disabled beneficiary who has received a settlement from a personal injury claim or has received an inheritance. The great fear for the family being that the proceeds received will have the impact of removing the disabled beneficiary from social security benefits, and the loss of State support benefits, such as Medicaid.
There are different types of “Special Needs Trusts” that a disabled beneficiary might have, but the focus of this article is on the First Party Special Needs Trust. A type of trust where the disabled beneficiary is in actual receipt of funds (such as an inheritance or personal injury settlement) rather than funds from a third party (such as a grandparent).
A disabled beneficiary who is actual receipt of funds runs the risk of losing all important State support, such as Medicaid. Why? Because these types of programs are means tested. In other words, the disabled beneficiary will have too much money be eligible for the program. Step forward, the First Party Special Needs Trust.
The First Party Special Needs Trust (also known as a D4A trust) allows the disabled beneficiary under the age of 65 to transfer their funds into such trust without impacting their continuing rights to social security benefits. The funds transferred into the trust is then held by the trustee for the benefit of the disabled beneficiary.
Now that we know how much of a big deal the D4A trust is to a disabled beneficiary, we turn to the lawyer to make sure that the drafting of the trust is on point and does not include incriminating provisions which will inadvertently render the entire trust available for the purpose of important means tested benefits.
To the inexperienced drafting attorney, the First Party Special Needs Trust needs to be carefully drafted to make sure that it does not fall foul of a review from the Social Security Administration. Rejection by the Administration means that the entire value in the trust is available. The disabled beneficiary loses important State support eligibility.
That being the case, the following are incriminating provisions that will render the funds in the First Party Special Needs Trust as being “available” (and therefore making the beneficiary ineligible for State support benefits):
Early Termination Provision
You have a provision in your First Party Special Needs Trust that allows a trust to be terminated before the death of the disabled beneficiary and you are going to have a problem with the reviewing Social Security Administration. Why? Because they want their money on the death of the disabled beneficiary. A First Party Special Needs Trust must include the State as receiving all amounts paid to the disabled beneficiary during his or her lifetime. A termination provision allows the beneficiary or trustee to circumvent paying the State back. Terminate the trust, pay others but not the State upon the death of the disabled beneficiary. The Social Security will not allow a termination provision.
Revocability of the Trust
If the disabled beneficiary can amend or revoke the First Party Special Needs Trust, then the entire amount in the trust is considered available. Why? Because if the trust can be revoked by the beneficiary, then the beneficiary is treated as having too much control of the funds in the trust. The funds in the trust will therefore be considered to belong to the disabled beneficiary.
Sole Benefit Rule
A First Party Special Needs Trust can benefit no one but the disabled beneficiary. Any payment from the trust to someone other than the beneficiary runs the very real risk of making every last dollar in the trust available (and therefore making the disabled beneficiary ineligible for State support). Of course, not everything is black and white. A payment to a third party if it provides some level of benefit to the disabled beneficiary is fine. The disabled beneficiary must derive some level of benefit i.e., a caregiver of a disabled beneficiary.
State Medicaid Reimbursement Requirement
As mentioned earlier in this article, a First Party Special Needs Trust must include the State as the first named beneficiary. No reimbursement provision in the trust is tantamount to having the entire trust considered available for the purpose of means tested State support. Also be careful in the drafting of the clause so that the payback to the State is not limited to any particular State. It must include all States.
A disabled beneficiary dies. Expenses such as funeral expenses are paid back prior to reimbursing the State, right? Wrong! What about paying back a third party for a debt owed by the beneficiary? Nope. A First Party Special Needs Trust is limited to what can be paid back on the death of the beneficiary. This is because funds in the trust must be maximized as much as possible so that the State can be repaid for everything they have paid out to the beneficiary. So, language in a First Party Special Needs Trust needs to be carefully drafted so that only certain expenses can be paid out on death (such as “reasonable” administration fees!). Anything else will render the entire amount in the trust as being available and make the disabled beneficiary ineligible for all important State support.
The list of prohibited clauses described above is not exhaustive but are what I have seen in First Party Special Needs Trusts that have been drafted by the unwary. Careful drafting of such a trust will enable the continuing eligibility of the disabled beneficiary for important State benefits such as SSI and Medicaid.
A First Party Special Needs Trust is a complicated trust. Hiring a Special Needs Planning attorney will provide you with peace of mind that a disabled beneficiary’s trust is drafted efficiently with the beneficiaries’ best interests in mind. If you need to hire a knowledgeable and experienced Special Needs Planning attorney, call the Law Office of Antony M. Eminowicz, PLLC at (845) 481-4688 for a free consultation.