Supplemental Needs Trust
Protecting your disabled loved ones
Establishing a Supplemental Needs Trust is an important tool when an individual wishes to protect a disabled loved one. The sole purpose of such a trust is to enhance the disabled person’s quality of life. The Supplemental Needs Trust is a trust that is established by a third party to benefit a person with disability by supplementing the government benefits they receive.
There are two major types of supplemental needs trust in New York: one that is set up on death (through an individual’s Last Will & Testament or living trust) or one that is set up during the individual’s lifetime. It is important for the individual to choose the right type of trust.
If a Supplemental Needs Trust is set up upon the death of an individual, that person’s Will or Living Trust will have language directing the personal representative to transfer assets into the Trust for the benefit of the disabled beneficiary. Such a trust will protect the beneficiary from losing their eligibility for any governmental benefits they presently receive or expect to require in the future, while also preserving their inheritance. The beneficiary need not have any involvement in the trust, as it will be set up and administered after the giver’s death.
A Supplemental Needs Trust that is set up during the lifetime of the individual (say, a parent) for the benefit of a disabled beneficiary requires that the individual deposit money and other assets into the lifetime trust account and manage it while they are living. Whereas this type of trust requires more work during one’s lifetime, it also brings with it its own rewards, including:
- Freedom in managing the trust, in whatever way they wish
- Minimize disruption for the disabled beneficiary if the parent or donor goes into a nursing home or hospital
- Avoidance of probate because there is no death required to trigger the creation of the trust itself
- Control of how future trustees will act for the benefit of the disabled beneficiary. A paper trail left during the lifetime of the individual will enable future trustees to better provide for the disabled beneficiary
A common misunderstanding is the interchangeable use of the Supplemental Needs Trust and the Special Needs Trust. The primary distinction is whose money is funding the trust.
If the trust is funded with assets belonging to someone other than the person with a disability or their spouse, such as by a parent or grandparent, then it is a Supplemental Needs Trust. If the person with a disability is funding the trust with their own assets, such as through an inheritance or personal injury settlement they have received, it is a Special Needs Trust.
Special Needs Trusts
In New York, a Special Needs Trust specifically refers to a trust set up for a disabled person who already has his or her own assets. This could be from a personal injury settlement or an inheritance received.
Unlike a Supplemental Needs Trust (insert hyperlink to take reader to separate page), the Special Needs Trust deals with the disabled individual’s own assets (and not from a third party i.e. parent).
The purpose of a Special Needs Trust is the same as with a Supplemental Needs Trust: to enhance the Beneficiary’s quality of life by providing for those supplemental needs, such as more sophisticated medical, rehabilitative, recreational or educational aid, not provided by governmental assistance.
‘Knowing’ the beneficiary under a Special Needs Trust is a vital cog is in the administration of such trust. The Trustee should take time to review thoroughly and understand the beneficiary’s current financial, medical, emotional, and social circumstances.
How is a Special Needs Trust set up?
A Special Needs Trust is typically created by a parent, grandparent or legal guardian for a disabled person under the age of 65. Any money that remains in the fund after the beneficiary’s death must be used to pay back Medicaid (this is not the case with a Supplemental Needs Trust).
If a parent or grandparent is establishing the Special Needs Trust then a trust agreement must be executed, a tax identification number obtained and an account established.
There is less court supervision of the Special Needs Trust if set up by a parent or grandparent. This is not the case if a Guardian or the court is establishing the Special Needs Trust for the disabled. Here, the first step would be for a petition to be filed at court requesting the authorization that a Special Needs Trust be set up. A hearing date for the request is determined and, provided the court agree that it would be in the best interest of the disabled beneficiary, the court will then issue an order allowing for the establishment of the trust. The court will then thereafter maintain continuous supervision by requesting routine accountings of the Special Needs Trust.
How is the Special Needs Trust administered?
The individual confirmed by the court as Trustee or nominated by the Grantor has the responsibility to manage the trust. In ‘managing’ the trust, the Trustee has complete discretion to deal with the assets held within the trust as he/she see fit. The Beneficiary must not have the ability to ‘control’ assets in the trust otherwise the assets could be considered ‘available’ for government assistance purposes.
It is vital that the Trustee keep records of all transactions of the Special Needs Trust (including keeping original documentation of receipts, invoices, and such like). A disabled beneficiary has the right to request an accounting at any time. This scrutiny is heightened if the Special Needs Trust has been established through the courts (where an annual accounting must be supplied to the court).
The Trustee must be aware of tax implications that would need to be dealt with throughout the life of the Special Needs Trust. In addition, the Trustee will need to determine the “payback” amount upon the death of the disabled beneficiary or termination of the trust. Medicaid state agencies have typically had difficulty in providing a reliable and final figure, so the prudent Trustee will request a written statement of the amount due prior to settling.
The Special needs Alliance provide an excellent source of information in the administration of a Special Needs Trust (hyperlink the pdf)
A Special Needs Trust will be the obvious planning tool should a disabled individual receiving government benefits be the recipient of an inheritance or personal injury funds. Often, a call will come through to the office that an estate or a personal injury case has been settled and so time is very often of the essence.
Murad Law recognizes that it is imperative the Special Needs Trust be prepared and in place prior to an inheritance or personal injury settlement thereby preventing any break in coverage for a means tested program such as Medicaid or SSI.
We also recognize the complexities of trust administration and how overwhelming it might be for a family member to administer a Special Needs Trust. Murad Law can either help serve as trustee of a Special Needs Trust or will help the lay trustee navigate their way through the complications of the administration of the Special Needs Trust. Care will always be taken to identify the specific type of benefit(s) the disabled individual is receiving and how this will be affected by any distribution from the Special Needs Trust.
There is no ‘one size fits all’ solution to the type of trust that will best benefit the disabled person. Murad law helps to advise clients of the benefits and drawbacks of each type of trust so that the optimal type of protection trust may be set up; thereby providing a family with the sense of comfort that their loved one will be cared for yet promote their skills and abilities to maximize independence and the ability to enjoy life.