Under what circumstances should a self-settled SNT be considered for a special needs individual?
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The self-settled SNT should be considered when a special needs individual has (or is expected to
receive) some significant amount of assets. Use of a self-settled SNT will permit the special needs individual to qualify for SSI and Medicaid without having to spend down assets to qualify for these needsbased government programs. The trust will protect the assets while the special needs individual is alive and provide benefits to the special needs beneficiary for supplemental purposes. That is, the benefits from the self-settled SNT are generally those not otherwise provided by Medicaid. The self-settled SNT can only be created for the benefit of a disabled beneficiary under age 65.
Hence, the self-settled SNT is not appropriate for a beneficiary who is not expected to need the benefits from SSI or Medicaid. Since there is a payback requirement at the death of the SNT's beneficiary, the SNT should generally not be used for assets that are not owned by the special needs beneficiary. Although a self-settled SNT can only be created by a beneficiary under age 65, an SNT may be useful in the circumstance of a parent or grandparent of a special needs individual if the parent or grandparent is concerned about long-term care expenses and would like to protect assets by creating an SNT for a disabled special
needs child or grandchild.
The self-settled (d)(4)(A) SNTs should be created to hold the assets owned by or to be received by a
special needs beneficiary who needs (or probably will need) to qualify for SSI and Medicaid. The rules indicate that the trust must be created by someone other than the special needs beneficiary, such as a parent, guardian, etc. The trust should be carefully drafted. Some states have preapproved forms for the self-settled SNT. In most instances, a corporate trustee will be required, unless the amount of the trust fund makes a corporate trustee infeasible. The trust should be designed to supplement rather than replace benefits received from public sources such as Medicaid. The trust terms should prevent distributions of cash directly to the special needs beneficiary and avoid distributions for expenses that are provided for by other sources.
The Miller trust is designed to be used in a state that uses income cap requirements with respect to
Medicaid eligibility. It is different than the other two types of self-settled SNTs since it can be created by an individual over age 65. The trust is designed to receive all of the beneficiary's income, including pension and Social Security income. The trust will hold the income received along with the accumulated income. The income received and accumulated in the trust will not be treated as the beneficiary's income for the purposes of the Medicaid income test. The trustee will disperse an amount up to the income qualification limit of Medicaid to the nursing home and retain excess income. At the death of the beneficiary, Medicaid is fully reimbursed for expenditures.
A pooled trust is a form of self-settled SNT created and administered by a nonprofit organization. The
funds contributed by the special needs beneficiary are placed in a separate account since the pooled
trust holds funds contributed by many different special needs beneficiaries. The trustee of the pooled trust manages the separate account for a special needs beneficiary similar to the trustee of the self settled (d)(4)(A) SNT. That is, distributions are made for supplemental expenditures for the beneficiary. At the beneficiary's death, the assets remain in the pooled trust for the benefit of other beneficiaries or are used to reimburse the state for Medicaid expenditures.
Funds contributed to a self-settled SNT are not considered income or assets of the beneficiary for the purposes of qualification for SSI or Medicaid. Hence, the purpose of the self-settled special needs SNTs is to protect the assets of the beneficiary for supplemental purposes while assisting in qualification for public benefits
Distributions from an self-settled SNT should be used to supplement rather than replace benefits available from the public programs. The distributions should be designed to avoid being considered income of the beneficiary for SSI purposes. Hence, distributions are usually made in-kind to provide items or services that will not count as income or assets of the beneficiary for SSI and Medicaid purposes. Examples of distributions that should be permitted include:
• purchase of a home for the special needs beneficiary equipped for the relevant disability
• purchase of an auto or Van for the special needs beneficiary
• purchase of clothing
• purchase of appliances
• home or auto maintenance services
• therapies not covered by Medicaid
• vacations
Of course, the state welfare authorities will keep a close watch over self-settled SNTs and distributions of principal may have to be preapproved. Distributions that should be avoided from the self-settled SNTs include:
• amounts to be used for food and shelter for the beneficiary
• cash distributions
• payment for services already provided from another source
• distributions for the personal benefit of anyone except the special needs beneficiary
During the lifetime of the special needs beneficiary, a self-settled SNT is not a countable asset. However, if the special needs beneficiary has already received benefits from the Medicaid program, Medicaid must generally be reimbursed for expenditures that were made prior to the creation of the trust when the SNT is funded.
After the death of the special needs beneficiary of the self-settled SNT, the rules require that the appropriate state authority be reimbursed for expenditures made by Medicaid for the benefit of the beneficiary of the SNT. Although the payback provision seems to diminish the benefit of a self-settled SNT, it is important to remember that the reimbursement is at the Medicaid rate which is generally far less than the private pay rate the special needs individual would have otherwise paid for the services out of the funds that were used to fund the SNT.
Interestingly enough, the statutory rules for the self-settled SNT require that the trust provides for
remainder beneficiaries other than the state government. These remainder beneficiaries will receive any remaining trust funds to the extent the trust has assets remaining after the payback provision has been satisfied. Hence, the self-settled SNT could potentially protect the special needs beneficiary's assets for other family members.
a. There is some dispute about the gift tax consequences of creating and funding the self-settled SNT. Certainly, it is a transfer for less than full and adequate consideration. However, the special needs beneficiary of the trust who contributes his or her property has benefits from the trust during lifetime that are not measurable with any accuracy. The primary remainder beneficiary is the state to reimburse for expenditures made by Medicaid. In effect, this is a remainder beneficiary that is a "creditor" of the beneficiary. The only potential gratuitous transfer is to family remainder persons and it would appear that this gift is incomplete since the trust funds could have been fully expended. If there is concern about the gift tax issue, the gift could be rendered incomplete by leaving a general power of appointment at death for the special needs beneficiary to distribute any remaining assets after the state has been reimbursed for Medicaid expenditures.
b. In most instances, the self-settled (d)(4)(A) SNT has been drafted as a grantor trust and all income
in the trust will be taxed to the special needs beneficiary. There are several provisions that could
be included in the trust to preserve the grantor trust status. Care should be taken not to choose a
grantor trust provision that makes the funds available to the special needs beneficiary. There is also a possibility of creating a qualified disability trust which would be a separate taxpayer. The choice of income tax status is determined on a case-by-case basis as to which status is preferred.
In many instances, a disability that creates the special need's condition results from an injury that might have been caused through the negligence of another. Personal injury cases are very complex and a specialist in this matter is necessary. The personal injury attorney will be able to estimate the types of damages that might be recoverable and respond to defenses that might be raised by the defendant. These cases are usually handled on a contingent-fee basis. It is generally recommended that the special needs claimant or his or her family members seek the assistance of a personal injury attorney and not attempt to settle the claim on their own.
Describe the potential impact of a settlement or judgment from a personal injury case on a special needs individual's qualification for needs-based government benefits programs.The needs-based government programs, notably SSI and Medicaid, have strict income and resource limits. A substantial personal injury settlement or judgment could have the effect of rendering the special needs claimant ineligible for SSI or Medicaid. This possibility must be planned for by having the personal injury attorney work carefully with an attorney who specializes in government benefits planning.Describe the potential impact of a settlement or judgment from a personal injury case on a special needs individual's benefits from government programs not based on need.The government benefit programs not based on need that are most relevant to this issue are Social Security Disability Income (SSDI) and Medicare. If the personal injury award covers lost wages under the Worker's Compensation system, there is a limit on the combined total that can be provided from Worker's Compensation and SSDI based on a percentage of the injured party's highest average monthly earnings prior to the disability. If the personal injury award is not from the workers compensation system, it should have no impact on SSDI. If the personal injury award includes amounts for past and future medical expenses, there may be a reimbursement requirement to the extent Medicare has already paid for such medical expenses.How can a self-settled SNT be used in conjunction with a personal injury settlement or judgment?There are two types of trusts that can receive the proceeds of a settlement of a personal injury case without affecting eligibility for SSI or Medicaid. These trusts are the self-settled payback (d)(4)(A) SNT and the pooled trust discussed earlier. The rules require that the state be reimbursed for what is known as a Medicaid lien. That is, the state must first be reimbursed to the extent Medicaid benefits have already been provided to the disabled party receiving the personal injury award. As we discussed earlier, the state must be reimbursed at the death of the beneficiary for any benefits received from Medicaid after the SNT was funded. In the case of the pooled trust, the state may also be paid back to some extent at the death of the beneficiary, while the remaining funds will become part of the assets of the pooled trust for the benefit of other beneficiaries. If a transfer to an SNT is contemplated for a personal injury award, it is important to contact the Medicaid department within the relevant state to inform them of this possibility. In many instances, the self-settled SNT might have to be preapproved by the state authorities. In addition, the family members and attorney handling the case should be aware of any Medicaid lien that exists before the trust is funded.What is the significance of a structured settlement with respect to a personal injury award that might be received by a special needs individual?A structured settlement is a specialized type of settlement agreement in the case of a personal injury award. It is an agreement between the defendant and the plaintiff, where the plaintiff agrees to accept a series of payments over time in lieu of a lump sum settlement. Typically, the defendant will pay a sum to a structured settlement company. The structured settlement company may purchase an annuity or US Treasury Obligation to fund the structured settlement obligation.Describe the planning that should be employed with respect to which structured settlement and the claimant's eligibility for needs-based government benefits?A structured settlement payment would be treated as income for the purposes of SSI and Medicaid. Hence, it is typical for the structured settlement to be placed into a payback SNT or pooled trust to permit the beneficiary to qualify for Medicaid benefits if this will be necessary.