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New York Special Needs Frequently Asked Questions

You probably have a lot of questions about establishing a Trust and creating a sound financial plan – everyone does. That's why we've collected our most frequently asked questions and answered them here.

Can a Special Needs Trust be used to:

I've never heard of a Special Needs Trust before. Is it something new?

Special Needs Trusts were authorized by Congress through the Omnibus Budget Reconciliation Act of 1993 (OBRA 93). A "Special Needs Trust" describes any trust intended to provide benefits without causing its beneficiary to lose public benefits he or she is entitled to receive. There are two general categories of Special Needs Trusts: Self-Settled and Third-Party.

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What is a "Supplemental Benefits Trust"?

It's the same as a Special Needs Trust. Some lawyers simply prefer to use the term "Supplemental Benefits" or "Supplemental Needs" instead. The terms are interchangeable. They describe the Trust's purpose and are not legally different.

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What is a "Self-Settled" Special Needs Trust?

Sometimes a recipient of public benefits receives assets that prevent continued benefits eligibility. In this case, it may be possible – and advisable – to place assets into a Special Needs Trust to regain or continue government benefits eligibility.

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Who can establish a Special Needs Trust?

Anyone. A Third-Party Special Needs Trust can be established by one person for the benefit of another. The person establishing the Trust – called the settlor , grantor or trustor – chooses to make some of his or her assets available for the benefit of the disabled beneficiary. Third-Party Special Needs Trusts are often established by parents for their disabled children.

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If a Special Needs Trust is established by a guardian or court, is it still "Self-Settled?"

Yes. Federal law states that a Trust established with assets that would have belonged to a person – or his or her conservatorship – is self-settled regardless of who signs the Trust instrument. In some states the "conservator" is referred to as the "guardian."

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Does my family need a Trust?

Not everyone with disabilities who receives a large tort settlement needs a Special Needs Trust. A Trust is usually necessary only if the person is receiving Medicaid , SSI or other means-tested government benefits. Small settlements may not warrant the establishment and administration of a Trust. Other ways can be found to shelter the settlement funds. Even if the person is not currently receiving benefits, a Trust must be considered if there is a possibility that the person may receive means-tested government benefits in the future.

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What kinds of public benefits do Special Needs Trust beneficiaries receive?

Special Needs Trusts can protect different public benefits. Most commonly, Special Needs Trusts are intended to permit Supplemental Security Income (SSI) and Medicaid recipients to receive some additional services or goods.

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Does a Special Needs Trust qualify a person for public benefits?

No. A Special Needs Trust does not itself make public benefits available. Nor does it make it easier to qualify for them. The beneficiary must qualify for the benefits program – either before or after the Trust is established. If properly designed, the Trust will not cause a loss of benefits – although the level of benefits may be reduced in some circumstances.

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Why would someone with assets want to place money in a Special Needs Trust just to qualify for government benefits?

Many benefits are extremely expensive and financially draining when paid for privately.

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Must a person who receives Medicaid or other means-tested benefits stay on them?

No. If the disabled person regains independence, his or her Special Needs Trusts can be terminated and public benefits stopped. If it is a Self-Settled Special Needs Trust, any money advanced from Medicaid since the inception of the Trust must be repaid. Any money remaining in the Trust can be distributed to its now-independent beneficiary.

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What types of assets go into a Self-Settled Special Needs Trust?

These Trusts are often established by people who have received an inheritance or personal injury settlement – often from the incident that caused the disability. Sometimes people with pre-existing wealth determine that, upon becoming disabled, creating a Special Needs Trust is to their advantage.

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Who should be in charge of the Trust?

The combination of a family member and a professional trustee is often the best arrangement for administering the Trust. The disabled person cannot serve as trustee. The professional trustee must be sensitive to the needs of the beneficiary and must be knowledgeable about government benefits and the administration of Special Needs Trusts. It's not advisable to have a family member as sole administrator. Family members lack the necessary expertise to manage these Trusts and often unintentionally abuse them, rendering the beneficiary ineligible to receive public benefits.

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What special rules govern Third-Party Special Needs Trusts?

There are actually few rules. The most important rule is that the Trust terms should not create any entitlement to either income or principal. If the trustee has complete discretion whether to make distributions for the beneficiary, the Trust principal and income will usually not be counted as available.

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What special rules govern Self-Settled Special Needs Trusts?

Self-Settled Special Needs Trusts are much more complicated than Third-Party Special Needs Trusts. Typically, a Self-Settled Trust must comply with a federal law requiring that it be established by a judge, a court-appointed guardian or the parents or grandparents of the beneficiary. Social Security regulations often limit Trust creation to judges and court-appointed guardians. In addition, most Self-Settled Special Needs Trusts must include a provision that repays state Medicaid agencies for benefits upon termination of the trust – often called a "Payback" provision.

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When is a "Payback" provision required?

A "Payback" provision may be required only if the funds being used to establish the Trust are those of the beneficiary. Cases involving personal injury settlements fall under this category. If a parent's funds are used to establish a Trust for a child, a payback provision is not required.

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What does the Trust pay for?

A Special Needs Trust can provide for physical therapy, medications and medical treatment, and transportation. It also may allow for other life-enhancing items, such as education, entertainment, vacations, companionship, furniture and furnishings (such as a television or computer), and some utilities (e.g., cable television and telephone service, but not electricity, gas or water). The general rule is that a Trust may not provide the beneficiary with food, clothing or shelter (e.g., rent), or any asset which could be converted into food, clothing or shelter – including cash. If the Trust is structured to pay for food, clothing or shelter, the disabled person's SSI payments will be reduced. However, with proper Trust administration, the basic benefit as well as Medicaid eligibility can be preserved. Distributions of cash to the beneficiary are almost never permitted.

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Can a Special Needs Trust be used to buy a house or pay rent?

Yes. However, there are some strict SSI and Medicaid regulations affecting the use of Special Needs Trusts (or any third-party payment) for shelter. For example, if the beneficiary dies, the home would be subject to the Medicaid payback provision and the home may be lost. Before buying a house through the Trust, consult an experienced lawyer knowledgeable about the intricacies of federal benefit programs.

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Can a Special Needs Trust buy an automobile or van?

Yes – but insurance is often difficult to arrange. It's usually better for the Trust to lease the motor vehicle.

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Can a Special Needs Trust pay for vacations?

Yes.

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Can a Special Needs Trust distribute cash to the beneficiary?

Any cash distributed to a beneficiary by a Special Needs Trust, after the first $20.00 per month, will reduce the SSI payment dollar for dollar. If the SSI payment is completely eliminated, Medicaid will be lost. It is not good practice for a trustee of a Special Needs Trust to distribute cash.

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Can the Trust make gifts to persons other than the disabled person?

No. Federal and state laws stipulate that Special Needs Trusts are "for the sole benefit" of the disabled person. Distributions to anyone other than the Trust beneficiary are prohibited.

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How are d(4)(A) Trusts taxed?

There are income, gift, and estate tax considerations in establishing and administering a d(4)(A) Special Needs Trust.

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Is it easy to establish a proper Third-Party Special Needs Trust?

While the principles involved in Third-Party Special Needs Trusts are simple, there are a myriad of choices involved in the actual drafting of a Trust. In addition, administration can be extremely difficult. A seasoned lawyer, familiar with public benefits programs and Special Needs Trust provisions, should always be involved in preparation of a Trust. While many legal matters can be undertaken without a lawyer, or with a lawyer with general background, Special Needs Trusts are complicated enough to require the services of a practitioner.

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Do you need our help?

A checklist of questions to ask yourself.

  • Does the person in my family with special needs ("the beneficiary") receive SSI and/or Medicaid?
  • Is it possible that he or she will participate in the future in any public benefit programs that receive Medicaid dollars, such as group housing?
  • Am I familiar with…
    • SSI rules that will affect the beneficiary?
    • the various Medicaid programs that will affect the beneficiary?
    • the concept of In-kind, Support and Maintenance (ISM) and how it affects eligibility?
    • the rules pertaining to pro rata contributions from third parties benefiting from the Trust?
    • the rules pertaining to child support obligations?
    • the rules concerning taxation of d(4)(A) Trusts?
  • Do I know a competent trustee to handle payments without disqualification of benefits?
  • Has our family established a budget and an estate plan?
  • Do I have the time to become an expert in these issues – or find out if my family's attorney is one?

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This article does not constitute legal advice and should not be relied upon. If you need legal advice concerning this or any other topic please contact our offices to schedule a consultation with one of our attorneys at 914-684-2100 or 212-490-2020.