This article was originally published in the Collier County Bar Assocation Magazine, Adverse Witness. Click here to see the original.
Mr. and Mrs. Brady have come to your office for a consultation regarding their estate plan. They have two children, Bobby and Cindy. Cindy, who is 18 years old, has Down syndrome and is receiving governmental benefits, specifically SSI and Medicaid. Bobby, who is 25 years old, recently took the Florida Bar exam and is anxiously waiting for the results. Mr. and Mrs. Brady previously came to your office to establish a guardian advocacy for their daughter. Now, they are curious whether they need to do anything else to “get their ducks in a row” since they are travelling to Italy in a couple of months. What if they pass away in a plane crash? Who will be guardian for Cindy? How do they provide for Cindy financially but not jeopardize the benefits she receives for support? Would they need to disinherit Cindy from their estate plan?
You assure Mr. and Mrs. Brady that an estate plan can be designed to address their concerns. You discuss Last Will and Testaments to include guardianship provisions for Cindy. You also discuss Revocable Trusts that incorporate special needs trust provisions for Cindy. Mr. and Mrs. Brady feel relieved that they can preserve Cindy’s benefits with a special needs trust, and they do not have to disinherit Cindy in their estate plan. Mr. and Mrs. Brady request that you break it down so that they can understand what it all means.
What is a Special Needs Trust?
A special needs trust (SNT), also referred to as a supplemental needs trust, is a type of trust that is designed to meet the needs of individuals with disabilities while still allowing them to qualify for means tested governmental benefits, such as Supplemental Security Income (SSI) and Medicaid. The individual with a disability must meet the Social Security definition of disabled. An individual with a disability under the age of 65 years who has assets greater than $2,000 is not eligible for SSI and Medicaid. However, an individual’s governmental benefits may be preserved if a SNT is properly created. SSI and Medicaid provide a basic level of support, but a SNT can fill in the gap by supplementing the individual’s support to enhance his or her quality of life.
What are the Types of Special Needs Trusts?
There are two different types of Special Needs Trusts:
1. Third-Party Special Needs Trust; and
2. First-Party Special Needs Trust (or Self-Settled Special Needs Trust).
The difference depends on whose money is funding the SNT. A Third-Party SNT is funded with someone else’s money (not the beneficiary’s money). On the other hand, a First-Party SNT is funded with the beneficiary’s money. Let’s compare the two types of trusts.
1. Third-Party Special Needs Trust:
Typically, a Third-Party SNT is funded with assets belonging to a family member such as a parent or grandparent (i.e., third-party) to provide for the benefit of an individual with a disability, such as a child or grandchild. In other words, the assets are not the individual’s assets. The primary intent is to provide financial support to the individual while preserving the individual’s eligibility for SSI and Medicaid. There are two types of Third-Party Special Needs Trusts:
•Standalone Third-Party Special Needs Trust – A standalone Third-Party SNT is effective as soon as it is created and is a great option for lifetime gifts into the trust from different family members for the benefit of the individual.
• Testamentary Third-Party Special Needs Trust – A testamentary Third-Party SNT is created through an estate plan of a third-party that takes effect at the death of the third-party. The inheritance for the benefit of the individual is held in the SNT that is created under the Will or Revocable Trust of the thirdparty.
2. First-Party Special Needs Trust:
A First-Party SNT is funded with the assets belonging to the individual with a disability (i.e., first-party). Unlike a Third-Party SNT, the assets are the individual’s assets. These assets may come from a personal injury settlement paid to the individual or an unplanned inheritance distributed to the individual when proper estate planning was not done. For the trust assets to not be counted for SSI and Medicaid, the individual must be under the age of 65 when the trust is established and funded.
There are two types of First-Party Special Needs Trusts under federal law pursuant to 42 U.S.C. § 1396p(d)(4).
• (d)(4)(A) Trust (or under age 65 Disability Trust) – A (d) (4)(A) Trust is a standalone irrevocable trust to hold the assets of the individual with a disability under the age of 65. The trust may be established by a parent, grandparent, legal guardian of a beneficiary, the court or the individual beneficiary.
• (d)(4)(C) Trust (or Pooled Trust) – In a Pooled Trust, the assets of the individual with a disability are managed by a not-for-profit association. Essentially, the assets will be “pooled” with other beneficiaries, and separate sub-accounts are maintained for each beneficiary. The Pooled Trust requires a joinder agreement for any new beneficiary to be signed by a parent, grandparent, legal guardian of a beneficiary, the court or the individual beneficiary.
What is the Difference?
While First-Party SNT and Third-Party SNT serve the same purpose, the Medicaid payback requirement is a significant difference between the two types of trusts. A First-Party SNT must be irrevocable and have a repayment provision to the state for Medicaid benefits received by the individual with a disability during his or her lifetime. In other words, upon the death of the individual, any remaining trust assets must be used to pay back the state first. After the state gets their share, the balance, if any, may pass to the remainder beneficiaries named in the trust.
In contrast, a Third-Party SNT may be irrevocable or revocable, and there is no Medicaid payback to the state. When the beneficiary dies, all remaining assets pass to the remainder beneficiaries named in the trust.
Who may serve as Trustee?
When creating either a Third-Party SNT or a First-Party SNT, the selection of a trustee is essential. The trustee is going to be managing the trust on behalf of the individual with a disability (i.e., beneficiary). The trustee may be a person such as a family member or a corporate trustee, including a professional trust administrator. The trustee should also be familiar with social security eligibility rules. Under no circumstances can the beneficiary serve as a trustee.
Let’s go back to Mr. and Mrs. Brady who are in your office looking to “get their ducks in a row.” Now that you have discussed SNTs, they understand the need for a Third- Party SNT and not a First-Party SNT. As a part of their estate plan, upon death, their assets will be divided equally between Bobby and Cindy. Instead of passing outright to Cindy, her inheritance will be held in a testamentary Third-Party SNT created under Mr. and Mrs. Brady’s revocable trusts. They have selected a corporate trustee, that is familiar with the social security rules, to manage the Third-Party SNT for Cindy’s benefit to preserve her governmental benefits. You have advised Mr. and Mrs. Brady to change any contingent beneficiary designations for retirement accounts and life insurance to the Third- Party SNT. Upon Cindy’s death, there is no Medicaid payback, and any remaining assets will pass to Bobby. Mr. and Mrs. Brady are now ready for their trip to Italy, having the peace of mind that their estate plan is in order. A different result may have occurred if Mr. and Mrs. Brady did not come to your office to get their ducks in a row.
Lisa B. Goddy is a Partner at Wollman, Gehrke & Associates, P.A., bringing over 20 years of experience in trusts and estates law. She specializes in estate planning, wealth transfer, and probate and trust administration. Additionally, Lisa has extensive expertise in elder law, special needs trusts, guardianships, and business succession planning. She helps clients design comprehensive plans tailored to their goals, ensuring peace of mind for their future and provision for successive generations.