Special Needs Trusts and ABLE Accounts


What Is A Special Needs Trust?

A special needs trust (SNT) is a type of trust designed to provide the person with a disability with resources and assets to enhance his or her quality of life while maintaining that person’s eligibility for means-tested public benefits.

What Is An ABLE Account?

The ABLE Act (Achieving a Better Life Experience Act), also known as a 529A plan under the IRS Code, was signed into law on December 19, 2014. The Governor signed Louisiana’s law for creating ABLE Accounts on July 1, 2015. The law allows eligible individuals with disabilities to establish ABLE accounts. Subject to limitations, ABLE savings accounts will not affect eligibility for SSI, Medicaid and other means-tested benefits. Although ABLE Accounts are a welcome addition to the available planning tools, they do not suffice as a substitute for a special needs trust.

What Is Considered A Disability When Considering SNT’S And ABLE Accounts?

The Social Security Administration defines a disability for public benefits purposes as follows:

  1. An individual under the age of 18 must have a medically determinable impairment, or a combination of impairments, that results in functional limitations that are marked and severe and that has lasted or is expected to last for at least twelve months or result in death. 20 C.F.R. § 416.906.
  2. An individual 18 years of age or older shall be considered to be disabled if he 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. The impairment must be so severe that the claimant is unable to do his or her previous work or any other “substantial gainful activity” which exists in the national economy. 42 U.S.C. § 1382c(a)(3)(A), (B), 416(i)(1); 20 C.F.R. §§ 404.1505, 416.905.

I. Why Use a Special Needs Trusts Or Able Account For Persons With A Disability?

It is estimated that more than 54 million Americans have one or more physical or mental disabilities. Parents of children with a disability, regardless of age, have unique planning concerns that include healthcare, meeting developmental needs, qualifying for governmental benefits, providing for current needs, and planning for future needs when the parents are no longer able. Adults who are disabled due to a personal injury, an inherited ailment, or other reason have similar planning issues.

The typical person with a disability has insufficient resources to pay for their medical and support needs for their lifetime; therefore, maintaining eligibility for means- tested governmental programs such as Supplemental Security Income (SSI), Medicaid, residential assistance, and support services is critical.

  1. If a client is to receive a judgment or a settlement for a personal injury case, decisions should be made to determine how the funds are to be disbursed. Typical choices include disbursement to the client outright, use of a structured settlement, distribution to a special needs trust, or a combination of these options. If the client is currently eligible or may be eligible in the future for means-tested benefits, and is under the age of 65, consideration should be given to utilize a special needs trust.
    1. There is, unfortunately, a lack of knowledge of available tools and therefore a lack of preparation by parents of children with disabilities.
      1. Unfortunately, parents who do not have a plan often make mistakes that will disqualify their child from means-tested benefits.
      1. 62% of parents of children with a disability have no plan to cover the cost of caring for their child when they are no longer able to do so.
      1. 23% of parents spend at least $500 per month to address their child’s special needs.
      1. 60% of parents believe these costs will continue into adulthood, but less than half have a plan to cover these costs.
  • Of the parents with a plan, only 42% are confident that it will cover their child’s lifetime needs.

II. Public Benefits for People with Disabilities

  1. Supplemental Security Income (SSI) (42 U.S.C. §1381, et seq.)
  1. Supplemental Security Income is a joint state and federal cash payment entitlement program of up to $750 (2018) per month to “needy” individuals, namely, the blind, aged or disabled, who do not have sufficient resources to meet their basic needs for food, shelter and clothing. If both spouses qualify, the maximum monthly federal benefit rate is $1,125 (2018) for married couples. The definition of “disability” for SSI purposes is the same as the Social Security definition above. 42 U.S.C.A. Sec. 1382c(a)(3)(A). SSI is not available to residents of state institutions.
    1. SSI is means-tested; therefore, recipients must have limited income and resources. SSI is not based on employment history. Social Security Disability Income (SSDI) is based on employment history and is not mean-tested.
    1. Income Test – Single applicants must have countable monthly income in an amount less than the Federal Benefit Rate ($750 in 2018). For SSI purposes, income is anything received in cash or in-kind that could be used directly or by conversion to meet one’s basic needs for food or shelter. 20 C.F.R. § 416.1102. (This can include living in a home or apartment the is not owned by the individual seeking or receiving SSI and not paying rent.) Most income is countable, however, there are income deductions and exclusions. “Income” that is not spent in the month received is a resource or asset the following month and thereafter. The income limit is not the same as the SSI benefit. Income or in-kind support and maintenance (ISM) may reduce the monthly SSI benefit. If countable income exceeds the Federal Benefit Rate, SSI is reduced to zero.
      1. Types of Income
  • Earned income is income from work including wages, salary, tips, commissions, and net earnings from self-employment.
  • Unearned income includes Social Security benefits, pension payments, unemployment benefits, child support, annuities, rent, VA benefits, gifts, inheritances, interest payments, and cash from friends and relatives.
    • In-kind income is food or shelter received for less than fair market value including rent, mortgage payments, property taxes, electricity, gas, water, sewerage, and garbage collection.
      • Deemed income is part of the income of a spouse or parent(s) with whom an SSI recipient lives which is used to compute the SSI recipient’s benefit.
    • The income “limit” is dependent upon whether the SSI applicant receives earned income and/or unearned income and the applicable income disregards.
      • An SSI applicant may have unearned income of an amount one dollar below the SSI federal benefit rate plus $20. Thus, for 2018 an SSI applicant may have a maximum of $769 of unearned income and still be eligible for $1 of SSI. The monthly SSI benefit is reduced if the SSI applicant receives cash from others (including a special needs trust) in an amount that exceeds $20 per month. SSI will be reduced dollar for dollar for amounts received in excess of

$20.

  • The first $65 (up to a maximum of $85 if the individual has no income other than earnings) of earned income is also not counted.
    • Certain unreimbursed impairment-related work expenses (IRWE) may also be deducted from earned income. The items subject to the deduction may also be used for non-work activities. For example, co-pays, medications, counseling services, car modifications, attendant care services, transportation expenses, etc. may be deducted from earned income as IRWE to decrease the amount SSI is reduced due to earned income.
  • For 2018 an SSI applicant may have earned income below

$1,180 per month (the Substantial Gainful Activity (SGA) amount). For blind individuals, SGA is $1970 per month.

  • If an individual is receiving SSI and has earned income, SGA is not an issue; however, countable income will affect SSI benefits. An SSI applicant who works may have earned income that exceeds the SSI benefit rate. The first $65 of earned income plus one-half of the amount over $65 is not counted. Thus, SSI is reduced by $1 for every $2 earned over $65. If an SSI recipient earns $405 per month, subtract the $20 disregard, subtract $65 and divide by 2. ($405-$20-$65)/2=$160. SSI would be reduced by $160 per month.
  • Income Deeming
  • Deeming for a minor child with a disability (under age 18) causes an ineligible parent’s income to be deemed available to the child with a disability. As such the parents’ income is counted in determining the child’s eligibility under the income test. POMS SI 1320.700. Many children with a disability do not qualify for SSI and SSI-linked Medicaid due to the parental deeming rules. Deeming only applies if the child is living with the parent. If the child lives with a grandparent or in an institution, deeming does not apply.
    • After the child attains age 18, their parents’ income is no longer deemed to the child even if the child continues to live with their parents.
    • Another source of “income” that impacts the SSI benefit is in-kind support and maintenance (ISM). When the SSI recipient receives food and/or shelter from someone else (including a special needs trust), it is considered ISM. The SSI benefit is reduced by ISM pursuant to two formulas used to value the ISM. The formulas are the Value of One-Third Reduction Rule (VTR) and the Presumed Maximum Value Rule (PMV).
      • The Value of One-Third Reduction Rule (VTR) applies

when the SSI recipient lives in another’s household, receives both food and shelter from the household, and does not pay for his or her pro-rata share of the cost of the food and shelter. The VTR formula reduces the SSI benefit by one-third of the federal benefit rate or

$250 in 2018 ($750/3). If the individual lives alone, VTR does not apply; however, ISM will be governed by the PMV formula. VTR applies in full or not at all. 20 C.F.R. §416.1131(b).

  • The Presumed Maximum Value Rule (PMV) applies when VTR does not. If the SSI recipient’s food and/or shelter cost are paid by a third party (including a special needs trust), the SSI benefits will be reduced by the lesser of one-third of the federal benefit rate plus the $20 general income exclusion or the actual value of the food and shelter received. For example, the individual with a disability lives alone in an apartment, and a special needs trust pays the monthly rent of $1,000. SSI will be reduced by $265 ($735/3+$20).
    • Distributions from trusts of “in-kind” benefits also reduce SSI.
  • Resource Test- Applicants for SSI (and Medicaid) can have no more than

$2,000 in “countable” assets for an individual or $3,000 for a couple. 42 U.S.C. § 1396(a)(17)(B), 20 C.F.R. § 416.1202, MEM § I-1633. An asset is anything which can be liquidated and used for food, shelter or clothing.

  1. The resources of parents of a minor child with a disability are deemed available to the child and counted in determining the child’s eligibility for SSI. After the child with a disability attains age 18, the parent’s resources are no longer deemed to the child.
    1. Inheritances are treated as income in the month of receipt and as a resource as of the first day of the following month and thereafter. POMS SI 00830.550 and SI 01120.215. Most successions in Louisiana are uncontested and successors vest immediately upon death. Thus, the value of an inheritance should be a countable resource the month following the decedent’s death, regardless of whether a succession has been completed.
  • Retirement funds (pensions, 401k accounts, and IRAs) owned by an ineligible parent or spouse are not deemed to the SSI applicant. 20 C.F.R. § 416.1202(a). However for long-term care Medicaid eligibility, retirement funds owned by the community spouse are countable resources in determining eligibility for LTC Medicaid vendor payments. This should not affect SSI-linked Medicaid recipients not receiving LTC vendor benefits or HCBS waiver services.
    • Non-Countable Resources – Certain assets are not countable towards available resources for SSI eligibility purposes.
      • A principal residence, no value limit (this includes all land contiguous with the principal residence). POMS SI 01130.100. The eligibility rules for long-term care Medicaid vendor payments and HCBS waiver services impose a value limit on home equity.
      • Personal effects and household goods. POMS SI 01130.430.
  • One vehicle (no value limit) if used for the disabled person’s transportation or a member of the disabled individual’s household. 20 C.F.R. § 416.1218, POMS SI 01130.200, MEM § I – 1634.40.
    • Permanent life insurance that has a cash surrender value with an aggregate face value of $1,500 or less. This amount excludes additions from dividends. If the face amount exceeds the threshold, the entire cash value is countable. The exclusion cap is $10,000 for institutional Medicaid (Long Term Care), SSI MNP. 20 C.F.R. § 416.1230, POMS SI 01130.300, MEM § I-1634.18.
    • Prepaid funeral costs and up to $1,500 in a burial plot. In addition, the cash value of burial policies with a face value of $1,500 or less. The limit for institutionalized Medicaid (Long Term Care), SSI MNP is $10,000. POMS SI 01130.420, MEM §§ 1634.5 and 1634.6.
  • Up to $100,000 in an ABLE Account.
  • A disabled person may receive SSI and SSDI if the SSDI benefit is less than

the maximum SSI benefit. If cost of living adjustments to SSDI result in disqualifying the recipient from SSI, eligibility for Medicaid may be maintained through the Pickle Amendment.

  • Transfer of Assets Rules for SSI
  1. Other than transfers between spouses, to exempt individuals (such as a disabled child), and to exempt trusts, a transfer of the applicant’s or their spouse’s assets for less than fair market value within 36 months of applying for SSI will cause a period of ineligibility. The transfer rules are different from the more stringent transfer rules for long-term care Medicaid vendor payments and HCBS waiver services under the Deficit Reduction Act of 2005 (no transfers for less than fair market value within 5 years of the application for these services).
    1. The penalty may be triggered by failing to accept a pension, personal injury award, an inheritance, or by failing to enforce child support or alimony payments. POMS SI 01150.110E, MEM § I-1672.
    1. The penalty is calculated by combining the value of the uncompensated transfers during the 36 months prior to the SSI application (the look-back period). The total is divided by the SSI benefit rate ($750 in 2018). 42 U.S.C. § 1382b(c). Round the result to two decimal places then round down to the nearest whole number to determine the number of months of ineligibility. POMS SI 01150.111(A). Regardless of the amount of the transfer, the maximum penalty is 36 months. The penalty period begins on the first day of the month after the month of the transfer. The penalty for inheritances begin to run the month the inheritance was received (typically when the decedent died). The length of penalty for LTC Medicaid vendor and HCBS waiver payments is unlimited and has a different divisor (the total amount of the penalty, divided by the average cost of a month stay in a Skilled Nursing Facility (currently the average cost is somewhere between

$4,000 and $7,000 depending on where you live in Louisiana). The number you get is the number of months the individual facing the penalty must self- pay before being eligible to qualify for Medicaid). In addition, it begins to

run when the applicant is otherwise eligible for LTC Medicaid and applies to receive Medicaid benefits.

  • The transfer of assets penalty does not apply to or preclude an ineligible parent from transferring assets to avoid the SSI deeming rules that apply to a disabled child under age 18.
  • Medicaid (42 U.S.C. § 1396)
  1. Medicaid is a joint federal and state program that provides medical care to eligible persons. Medicaid pays the medical bills for the aged, disabled, the blind, and eligible individuals whose income and resources are insufficient to meet the costs of their medical needs. The cost of state Medicaid programs is divided between the state and the federal government based on each state’s per capita income relative to the rest of the nation. Each state defines their program within the federal guidelines and may choose to broaden coverage to include other groups and benefits specified under federal law.
    1. There are two broad categories of Medicaid recipients:
  1. Individuals who are Categorically Needy:
  • Individuals whose income and resources (assets) are less than the established thresholds.
    • Individuals over age 65 and whose income and resources are less than established thresholds.
    • Those who are disabled and/or blind and whose income and resources are below established thresholds,
      • Supplemental Security Income recipients
  • Child-related (pregnant, children under age 19 who are eligible, infants born to Medicaid-eligible mothers, children under six in low-income families)
    • Individuals who are Medically Needy. Louisiana provides benefits to “Medically Needy” individuals who meet all of the other qualifying criteria and cannot afford to pay for medical or long-term care expenses but

whose income and/or resources exceed the eligibility thresholds.

  • Regular Medicaid pays for doctor, hospital, mental health and some prescription drug expenses. The Louisiana Children’s Health Program (LaChip) is included. Eligibility is based on income rather than resources.
    • Medicaid provides services in home and community-based settings (HCBS) for example in the recipient’s home, or group home. Many HCBS programs in Louisiana have long waiting lists as there are limited “slots”. It is critical to sign up early due to the long waiting lists. Programs include:
      • Adult Day Health Care Waiver (ADHC)
  • Community Choices Waiver (CCW)
  • New Opportunities Waiver (NOW)
  • Children’s Choice Waiver
    • Residential Options Waiver (ROW)
  • Supports Waiver (SW)
  • Coordinated System of Care-Severely Emotionally Disturbed Waiver (CSOC-SED)
    • For many people, SSI is the gateway to Medicaid, as Louisiana residents receiving at least $1 of SSI are eligible for Medicaid (and the associated healthcare benefits). Maintaining eligibility for SSI and therefore Medicaid is crucial to retaining access to a broad range of medical services. A person who doesn’t qualify for SSI (and SSI-linked Medicaid) may qualify for Medicaid by other criteria.
  • Social Security Disability Income – 42 U.S.C. § 401, et seq
  1. Social Security Disability Income (SSDI) is disability insurance based on the individual’s work history. The program is not means-tested like SSI with which SSDI is often confused. The monthly benefit is determined by the amount the individual has paid into the system through payroll taxes. An individual’s spouse or child with a disability may be eligible for SSDI based on the worker’s benefit.
  2. Childhood Disability Beneficiaries (Disabled Adult Child Benefits). An individual

may be eligible for SSDI on another person’s work history. An unmarried child over the age of 18 who was disabled before age 22 will qualify for approximately 50% of the parent’s Social Security benefit (PIA) upon the parent’s retirement. This amount increases to 75% upon the parent’s death. If a child is receiving SSI and Medicaid and becomes eligible for SSDI due to the retirement, disability or death of the parent and the SSDI causes the loss of the SSI, the child will retain Medicaid if the child is under age 18 or is receiving benefits because he or she is a developmentally disabled child and the disability began prior to age 22.

  1. The Childhood Disability Beneficiary Benefit is not means-tested and is not reduced by earned income. However, excessive income may cause a redetermination of the child’s disability and whether the individual is substantially gainfully employed.

a)       After waiting two years, a child converting to the  Child’s Benefit/DAC will  be eligible for Medicare. Medicaid is available if the income and resource tests are met.

  • Concurrent SSI benefits may be reduced or eliminated by the Child’s Benefit or the DAC Benefit.
    • If SSI is lost due to excessive income from cost of living increases to SSDI, the Pickle Amendment may allow an individual to be eligible for Medicaid so long as the individual would otherwise be eligible for SSI.
  • Medicare
  1. Medicare is health insurance funded by the federal government for eligible individuals. Unlike SSI and Medicaid, Medicare is not means-tested as workers pay into the Medicare system during their working years.
    1. Medicare is available to:
  1. Individuals age 65 or older who are entitled to Social Security retirement benefits.
    1. An otherwise ineligible person who is over age 65 by purchasing Medicare insurance and paying a monthly premium.
  • SSDI recipients are entitled to Medicare Part A after 24 months of disability (these do not need to be consecutive months). Other than the Child’s Benefit, no benefits are payable for the first five months of disability; therefore, Medicare Part A begins after 29 months.

III. Forced Heirship

  1. In Louisiana, forced heirs are descendants of the first degree who, at the time of the death of the decedent, are twenty-three years of age or younger or descendants of the first degree of any age, who because of mental incapacity or physical infirmity, are permanently incapable of taking care of their person or administering their estate at the time of the death of the decedent. Grandchildren may be forced heirs of their grandparents if their parent dies prior to age 24 or if the grandchild is disabled (La. Civ. Code Ann. art. 1493). A descendant who is permanently incapable of taking care of their person or administering their estate includes a descendant who, at the time of death of the decedent, has, according to medical documentation, an inherited, incurable disease or condition that may render them incapable of caring for their person or administering their estate in the future (La. Civ. Code Ann. art. 1493(E)).
  2. Forced Heirs are entitled to the legitime. The forced portion (the legitime) is one fourth (25%) of the estate assets if there is one forced heir (excluding life insurance, qualified plans and IRAs). If there is more than one forced heir, the forced portion is one half (50%) of the estate assets. However, if the fraction used to calculate the forced portion is greater than the fraction of the decedent’s estate that the forced heir would receive if the decedent died intestate, the forced portion is calculated using the fraction of an intestate successor (La. Civ. Code Ann. arts. 1494, 1495). For example, Thibodaux dies leaving five children, one of which is a forced heir. The normal rule calculates the forced portion as one fourth (25%) of the estate assets. However, because Thibodaux died leaving five children, the forced portion is one fifth of the estate assets.
  3. Excluded from the calculation of the active mass to determine the legitime are life insurance policies benefits and premiums paid, deferred compensation plans, and qualified retirement accounts (La. Civ. Code Ann. art. 1505). These are valid

beneficiary designated assets and, as such, non-probate assets.

  • The forced portion may be left in trust or burdened with a usufruct in favor of the surviving spouse (La. Civ. Code Ann. art. 1496).
    • Thus, a child or grandchild (by representation) of any age who is disabled may be a forced heir. If a person with a disability receives assets, including their legitime, that causes their countable assets to exceed $2,000, they may be disqualified from SSI and Medicaid.
      • Due to Louisiana’s forced heirship laws, an unplanned inheritance may cause a child with a disability to lose their SSI and SSI-linked Medicaid.
      • Consider the problems of the first spouse dying intestate with a disabled, mentally incompetent child. The surviving spouse’s usufruct ends upon death or remarriage and cannot sell non-consumable property (e.g. real estate) without the naked owner’s (the disabled child) consent. Who will sign on behalf of the individual with a disability if the family home is to  be sold or refinanced?

IV. Planning Options and Solutions

  1. Families of disabled children (or other disabled family members) should consider their planning alternatives well in advance (arguably from the date of the onset of the disability). Planning ahead provides options and can help avoid disqualification from mean-tested benefits and a disruption of associated services.
    1. One option is to take no action to preserve means-tested governmental benefits. If the family’s resources are sufficient to provide for the lifetime care for the person with a disability, this may be a viable option. Consider the lifetime of healthcare benefits and support services available through Medicaid that may be lost.
    1. If qualification for means-tested benefits is a concern, a well thought out estate plan, including a will and one or more trusts for the benefit of the person with a disability, is recommended. The parent(s) may decide to leave the forced portion to a special needs trust. In the alternative, they may wish to more adequately fund a third party funded special needs trust pursuant to a carefully designed life care

plan.

  • Another option is to attempt to disinherit or limit a disabled child’s inheritance to their forced portion to limit the inherited asset’s effects on SSI/Medicaid eligibility. This is just not a good plan.
    • Some parents plan to leave an additional portion of the estate to one or more siblings of the child with a disability to “hold” it on their behalf. This option may work with the right family dynamics, but there are many problems with this type of arrangement including:
      • There is no guarantee the assets will be used for the benefit of the child with a disability.
      • The assets are subject to potential creditors, community property settlement from divorce, and mismanagement, etc. of the holder.
      • Income and taxable gain are taxed to the holder.
  • No control over how the assets are managed or used for the benefit of the child with a disability.
    • What happens when the holder dies? The assets will be subject to the holder’s will or Louisiana intestacy laws and may be inherited by the holder’s children or spouse or even the disabled individual (causing benefit issues in the anyway).
    • Leave assets by donation, will or beneficiary designation to a special needs trust.
  • Leave assets to an asset management trust with discretionary distributions to the beneficiary. If maintaining eligibility for governmental benefits is not a concern, the trust need not be drafted as a special needs trust.
    • If qualifying for SSI/Medicaid is not a concern, the trust need not qualify as a special needs trust. For example, if the assets left in trust are sufficient to support the disabled beneficiary’s needs without relying on SSI/Medicaid, the trust can be drafted to provide as much income and principal of the trust as needed. In most situations this option should only be considered for trusts funded with very large amounts, and if SSI/Medicaid will never

be needed. The trust can provide for asset management, creditor protection, and administration for a beneficiary lacking capacity or prudent judgment.

  • If the individual receives SSDI/Medicare based on his or her own eligibility or soon will be eligible, qualifying for SSI/Medicaid may not be an issue; therefore, a special needs trust may not be necessary. However, an asset management trust may be used to provide protection from squandering the assets and management for an incapable beneficiary.
    • ABLE Accounts. See Section IX.
    • There are a number of planning options to consider when a disabled person receives an unexpected financial windfall. An individual with a disability who receives an inheritance, personal injury judgment, or other financial windfall may use the assets for purposes other than funding a special needs trust. Funds remaining in the disabled person’s name or within access of the disabled person during the month of receipt is income and a resource or asset in subsequent months for the purpose of SSI/Medicaid eligibility. Available options include:
      • Pay off debt
  • Purchase a home, pay for home improvements or modifications
  • Pay for other non-countable assets (appliances, home furnishings, car, assistive technology, computer, pre-need funeral expense plan)
    • Contribute to an ABLE account
  • Assets remaining in the disabled person’s name may be used to fund a first-party special needs trust or a pooled trust to maintain eligibility for means- tested benefits

V.   Special Needs Trusts

  1. When planning for the needs of a person with a disability, the goals are to maximize the quality of life and optimize and coordinate available assets with governmental programs. Although the benefits available through SSI are not adequate to live above poverty levels, the associated Medicaid benefits (medical benefits and other

services) are often very valuable and indispensable to meet the needs of the person with a disability.

Although the primary reasons for establishing a special needs trust are to provide additional support and enhancing the beneficiary’s quality of life while maintaining eligibility for governmental benefits, there are additional benefits to establishing a special needs trust including:

  1. Providing an advocacy system to ensure clean and safe living accommodations with the least amount of restriction
    1. Asset management
  • Protection from financial predators and creditors
  • The parents’ peace of mind that a financial safety net and a care plan are in place for their child’s benefit
    • The trust may be established for a person currently receiving SSI/Medicaid or for a person that may be eligible in the future.
      • A parent may wish to establish a testamentary special needs trust in their will to provide for their child with a disability after their death. The trust may be funded by bequest in their will or by beneficiary designation of a life insurance policy insuring the parent’s life.
      • The receipt of gifts, a personal injury award, inheritance or other assets by the person with a disability will likely cause disqualification from SSI and/or Medicaid. A special needs trust may be established to administer these assets for the person with the disability while maintaining eligibility for SSI and/or Medicaid. Proper planning can help ensure that the spectrum of services for health care, rehabilitation, social programs, residential assistance and case management is preserved.
  • The powers of the Trustee of a special needs trust provide that trust distributions are to improve the beneficiary’s quality of life by providing for supplemental needs not provided by SSI/Medicaid. The Trustee may be prohibited from making trust distributions that reduce governmental benefits. In the alternative, the Trustee may be given the power to make distributions that reduce, but do not eliminate, governmental benefits. Distribution flexibility provided to the Trustee is an important consideration when drafting a special needs trust. Although a properly drafted special needs trust will not be considered a resource for SSI/Medicaid eligibility purposes, distributions of cash or other assets will be considered income in the month received and a resource thereafter. Improper administration of a special needs trust may cause the beneficiary to be disqualified from means-tested benefits.
    • A Trustee may be given the authority to make distributions that reduce, but do not eliminate governmental benefits. A common arrangement is to provide distributions to pay for adequate housing. Although SSI payments are for food and shelter, current monthly benefits are woefully inadequate. The Trustee may pay the beneficiary’s rent of $900 per month. If the Trustee pays the landlord directly, SSI is only reduced by 1/3 of the 2018 maximum SSI rate plus $20 under the Presumed Maximum Value rule.
    • In most cases it is imperative that the Trustee avoid making distributions of cash or other property to the beneficiary that would cause SSI to be eliminated. Even if SSI is reduced to $1, SSI-linked Medicaid is not affected.
    • Special needs are needs other than food, shelter or medical care provided by governmental benefits (SSI/Medicaid). Special needs may include healthcare and medical needs, quality of life goods and services, and goals and wishes of parents or other family members for the beneficiary to attain their maximum potential.
    • Special Needs Include But Are Not Limited To:
  1. Housing, including purchasing a home, additions and/or modifications to a home to accommodate the beneficiary with a disability
  • Household appliances and furnishings
    • Internet, phone and cable television
  • Clothing
  • A vehicle
  • Types of Special Needs Trusts
  1. There are two main types of special needs trusts – third-party special needs trusts and first-party (self-settled) special needs trusts. A third-party special needs trust is funded with assets owned by persons other than the beneficiary. For example, assets from the disabled person’s parents, grandparents, siblings, spouse or others may fund the trust. A first-party special needs trust is funded with assets owned by the person with the disability. For example, an inheritance or a personal injury award may be used to fund a first-party special needs trust.

VI.  Third-Party Special Needs Trusts

  1. A third-party special needs trust is typically created by a parent, grandparent, or other relative for the benefit of a person with a disability. The trust may be an inter-vivos trust or a testamentary trust. A third-party special needs trust is NOT funded with assets owned by the disabled beneficiary, rather assets owned by parents, grandparents or other relative typically fund the third-party trust.
    1. Typical Third-Party Special Needs Trust Plans
  1. A parent or grandparent drafting a will that includes a special needs trust for the benefit of a child or grandchild with a disability.
    1. A sibling drafting a will that includes a special needs trust for the benefit of a disabled sibling.
    1. A family member creating an inter-vivos third-party special needs trust and funding the trust with transfers to the trust during their lifetime.
    1. A spouse drafting a will that includes a special needs trust for the benefit of their spouse residing in a nursing home.
  • A parent, sibling or other person leaving assets to a special needs trust established by another person or a special needs trust that is already funded.
    • A family member may draft a revocable living (probate avoidance) trust with a special needs trust in lieu of a will.
    • The assets of a third-party special needs trust will be countable for SSI/Medicaid purposes if determined to be available to the beneficiary; therefore, language used in the trust document is critical.
      • A third-party special needs trust will not be considered a resource for SSI and/or Medicaid unless the beneficiary has a legal right to revoke the special needs trust and use the funds for food and shelter needs or if the beneficiary can use the trust principal for support and maintenance pursuant to the trust terms or state law. POMS SI 01120.200D(1)-(3).
      • Assets in a discretionary trust should not be considered a resource if the beneficiary needs a court order to compel a distribution. POMS SI 01120.010D.7.
    • Most third-party special needs trusts last for the lifetime of the beneficiary. Provisions for an earlier termination are often drafted into the trust in the event the beneficiary no longer qualifies for governmental assistance or the disability ceases.
    • A third-party special needs trust is typically drafted as a spendthrift trust for maximum creditor protection.
    • Unlike a first-party special needs trust, a third-party special needs trust is not

required to include a payback provision for Medicaid services.

  1. Assets remaining in the trust will pass through the beneficiary’s estate. However, the trust may be drafted with shifting principal interests that distribute the trust assets to other named beneficiaries (e.g. children or siblings). La. R.S. 9:1973.

VII.  First-Party Special Needs Trusts

  1. A first-party special needs trust is funded with assets owned by the person with a disability. The assets to fund the trust typically originate from an inheritance, personal injury award, or beneficiary designated assets (IRAs, annuities, life insurance).
    1. The Omnibus Reconciliation Act of 1993 and the Foster Care Independence Act of 1999 restrict the disabled person’s ability to exclude their own assets as a countable resource by transfers to a trust.
      1. The typical irrevocable trust is of no utility when qualifying for means- tested benefits as income that could be paid to or used for the beneficiary with a disability is an available resource. Payments from the trust are considered income in the month received. Principal or income payable to others are subject to transfer penalties and look-back rules.
  2. 60 month look-back for Medicaid LTC and HCBS
  1. 36 month look-back for SSI
  • Revocable trusts are also of no utility when qualifying for means-tested benefits as income and principal are considered owned by the beneficiary.
    • There is a statutory exception to general rules applicable to irrevocable trusts. An Under Age 65 Disability Trust (d4A, First-Party, or Medicaid Payback Trust), which meets the statutory requirements, allows an individual to transfer their own assets to the trust without triggering a transfer penalty for SSI or Medicaid. In addition, the assets in the trust will not be countable resources for eligibility purposes.
    • Requirements for an Under Age 65 Disability (d4A) Trust (a.k.a. first-party special needs trust)
      • The beneficiary with the disability must be under age 65 when the trust is created.
      • The trust must be irrevocable.
  • The trust must be funded with the assets of the individual with a disability. Assets are defined as both income and resources. 42 U.S.C. §1396p(e)(1); POMS SI 01120.201(B)(2).

A. Assets from others may be added to the trust.

  • The disabled beneficiary must be the sole beneficiary of the first-party special needs trust.
    • The trust must include a Medicaid payback provision. Upon the beneficiary’s death or upon earlier termination of the trust, the state will receive all amounts remaining in the trust up to the cost of care provided by Medicaid.
  • For SSI and Medicaid purposes the reimbursement to the state includes Medicaid expenditures before and after the creation of the trust. POMS SI 01120.203(B)(1)(h).
  • The first-party special needs trust may pay estate taxes (federal and state, if applicable) due to the beneficiary’s death. Trust administration fees may also be paid. However, funeral expenses, debts owed to third parties, taxes owed by the beneficiary’s estate (other than estate taxes) and payments to residual beneficiaries may not be paid prior to the Medicaid Payback to the state. POMS SI 01120.203B(3).
  • Trust payments for a pre-need funeral plan are allowed. Payment for the plan must occur prior to the beneficiary’s death.
  • Due to the Medicaid payback requirement, parents, grandparents, siblings or others should not contribute assets to a first party special needs trust. They should consider transferring assets to a third-party special needs trust.
  • The trust may be established through the actions of the disabled individual, parents, grandparents, legal guardian or a court. If the beneficiary is legally competent, the beneficiary may create a d4A trust (first-party special needs trust). The Fairness in Medicaid Supplemental Needs Trusts Act, 42 U.S.C. 1396p(d)(4)(A), was signed into law on December 13, 2016. This Act allows the disabled individual to create their own first- party special needs trust. This is a significant change because prior to the enactment of this law, a competent disabled individual was not allowed to create their own trust.
    • The person funding the trust must have legal authority to act on behalf of the beneficiary with a disability. An agent acting on behalf of the beneficiary pursuant to a power of attorney may fund the trust. A competent beneficiary may act on his or her own behalf to fund the trust.
    • Additional assets may not be added to the trust after the beneficiary attains age 65. Interest, dividends or capital gain on trust assets are not considered additions. If, prior to age 65, annuity payments are irrevocably assigned to a d4A/first-party special needs trust (a structured settlement from a personal injury award funded with an annuity) payments made after age  65 are allowed. POMS SI 01120.203B(1)(c).
    • Pooled Asset Trusts [aka (d)(4)(C) Trusts] are a type of first-party (self-settled) special needs trust. 42 U.S.C. § 1396p(d)(4)(C); HCFA Transmittal No. 64, Sec. 3259.7B; POMS SI 01120.203B(2); MEM § I-1720.
      • A pooled asset trust comingles the funds of other persons with disabilities for the purpose of maintaining eligibility for means-tested benefits.
      • Requirements
  1. The account is established solely for the individual with a disability by the individual, their parent, grandparent, legal guardian, or the court.
    1. The trust must be funded with the assets of the person with a disability.
  • The pooled asset trust is established and maintained by a non-profit association.
    • The assets are pooled together for investment purposes; however, each beneficiary must have a separate account.
    • Amounts remaining in the trust at the beneficiary’s death which are not retained by the trust must be paid to the state up to the amount of the cost of care provided. Amounts retained by the trust may be used for other disabled beneficiaries or paid to the non-profit association.

VIII.  Considerations Prior to Establishing a Special Needs Trust

  1. Establishing and funding a special needs trust is merely the beginning of the process of creating and maintaining a plan for a person with a disability.
    1. The selection of the Trustee can be one of the most difficult decisions when drafting a special needs trust. The beneficiary with a disability should never be the Trustee.
      1. In many cases a parent or sibling will serve as Trustee. This is an obvious choice because a close family member is familiar with the beneficiary’s needs. A family member is likely involved in the beneficiary’s daily routine and personal care needs. In addition, a parent or sibling typically will not charge a fee. If a fee is charged, it is likely less than a professional Trustee fee. One drawback is the family member will likely be unfamiliar with the numerous state and federal laws and regulations governing  special needs trusts and eligibility for public benefits. If the Trustee makes a distribution in violation of the rules regulating public benefits, the beneficiary could lose eligibility.
      1. A professional Trustee is another option. A professional Trustee may be a corporate Trustee such as a bank or trust company. Alternatively, a professional Trustee may be an individual such as an attorney or CPA. An advantage of a professional Trustee is their expertise in navigating the state and federal laws regulating special needs trusts and public benefits. A disadvantage of a professional Trustee is they will be unfamiliar with the beneficiary’s personal circumstances and daily routine. Unfortunately,

many banks and trust companies refuse to accept trust accounts with less than $250,000-$500,000 (or more) in financial assets.

  • If agreeable to the professional Trustee, appoint a family member to serve as Co-Trustee with the professional Trustee.
    • This list is not exhaustive but consider these factors when selecting a Trustee.
  • Does the Trustee have experience administering special needs trusts?
  • Does the Trustee have knowledge of public benefits programs?
  1. Will the Trustee act as a fiduciary and in the beneficiary’s best interest?
  2. Will the Trustee likely outlive the beneficiary?
  • Does the Trustee understand basic personal finance and is able to maintain accurate records?
  • Does the Trustee have a firm grasp of fiduciary responsibility?
  • Does/will the Trustee have frequent contact with the beneficiary to assess their wellbeing?
    • Should the Trustee be given the authority to make distributions that reduce, but do not eliminate SSI?
      • Providing the Trustee with distribution flexibility may be a good option.
  • Depends on the Trustee’s ability to prudently utilize this authority.
  • How Will the Special Needs Trust be Funded?
  1. Funding a special needs trust is a key part of the planning process. An empty or inadequately funded trust provides little or no benefit to the child with a disability.
    1. First-party special needs trusts are typically funded by a personal injury judgment, an inheritance, or other financial windfall. The SSI recipient/special needs trust beneficiary transfers the asset to the trust.
    1. Third-party special needs trusts may be funded during the settlor’s lifetime or upon the death of the settlor.
  2. Funding a third-party special needs trust during the settlor’s lifetime may be accomplished by transferring cash, securities, real estate, etc. to the trust. Assets may be transferred in one transaction or transferred over a number of years. Multiple individuals may transfer assets to the trust.
  3. A testamentary third-party special needs trust (created upon death by a will) may be funded by bequests in the will or by beneficiary designation of life insurance, annuities or retirement accounts.
  4. A special needs trust may be incorporated into a revocable living trust (probate avoidance trust). The special needs trust is funded and becomes operational upon the death of the settlor.
    1. Funding by beneficiary designation is another option. For example, the special needs trust may be funded by a life insurance policy.
  5. Life insurance provides the most financial leverage. A large death benefit may be purchased for a relatively small amount of premium. In many situations, life insurance is the only feasible way to adequately fund a special needs trust that will provide for a lifetime of benefits.
  6. Life insurance solves the problem of premature death of the parents. The parents may plan on accumulating a pool of assets to leave to the

special needs trust but die prior to attaining this goal.

  1. The younger the insured, the lower the premiums.
  1. The death benefit is tax-free.
  • In many situations the parents should consider purchasing a second- to-die life insurance policy insuring both parents. The premiums are lower than the same amount of insurance for a single-life policy. If funding for the special needs trust is not necessary until the second spouse dies, a second-to- die policy is a good option.
    • Retirement accounts are another type of asset that enables funding by beneficiary designation (e.g. IRAs, 401k accounts, 403b accounts, pensions, etc.) Because tax-deferred retirement accounts are funded pre- tax, income taxes are due when the distribution is made from the retirement account to the special needs trust. Taxes on the distributions will reduce the net amount of trust assets available to meet the beneficiary’s needs.
    • Annuities may also be used to fund a special needs trust by naming the trust the beneficiary of the annuity. Deferred income taxes on the annuity gains will reduce the net amount of assets available to fund the trust.
  • The Achieving a Better Life Experience Act (ABLE Act)
  1. Eligibility is limited to individuals with significant disabilities with an age of onset of disability before turning 26 years of age. The beneficiary may be over the age of 26 when establishing the account so long as the onset of the disability occurred prior to age
    1. Individuals entitled to benefits on the basis of disability or blindness under the SSI program or under the Social Security Disability, Retirement and Survivors program (SSDI) are eligible if the age criteria is met. For individuals who are not receiving SSI/SSDI and meet the age requirement, the account beneficiary must meet the definition of disability as defined in the final regulations.
    1. Annual contributions may not exceed the annual exclusion amount of $15,000 (2018). The aggregate account value cannot exceed the state limit for 529

education accounts. In Louisiana, this amount is $500,000 (2018). Contributions must be made in cash on an after-tax basis.

  • Assets in an ABLE account and distributions for qualified disability expenses are disregarded when determining eligibility for most means-tested benefits.
    • The first $100,000 is exempted from the $2,000 SSI resource limitation. If the account exceeds the $100,000 limit, SSI benefits will be suspended rather than terminated. The beneficiary will not lose eligibility if SSI benefits are suspended. Once the ABLE account has dropped below

$100,000, SSI benefits will be reinstated.

  • A beneficiary would not lose eligibility for Medicaid due to assets in their ABLE account even during the period when SSI is suspended for exceeding the $100,000 asset limit.
  • Assets remaining in the ABLE account at the beneficiary’s death are subject to state reimbursement for Medicaid payments made on the beneficiary’s behalf after the creation of the ABLE account.
    • Withdrawals for housing expenses do not effect means-tested benefits if spent in the month withdrawn. Withdrawals for housing expenses will be treated as resources if retained beyond the month of withdrawal. Housing expenses include rent, mortgage payments (including property insurance), property taxes, and utilities.
    • Withdrawals for other qualified disability expenses are not counted as resources even if the beneficiary holds the funds after the month of receipt so long as the funds are not used for other purposes and remain identifiable.
    • Earnings and distributions from the ABLE account for qualified disability expenses are not taxable income. Qualified disability expenses include housing, education, transportation, employment training and support, personal support services and assistive technology, health, prevention and wellness, financial management and administrative services, legal expenses, funeral and burial expenses, and other expenses as provided in the regulations.
  • Assets in an ABLE account may be rolled over into another ABLE account either for the designated beneficiary or a qualifying family member of the beneficiary.
  • More    information    about    Louisiana’s     ABLE    account    program     go    to https://www.able.osfa.la.gov/.

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