The Special Needs Trust Fairness Act
Thursday, June 9, 2016
Hello everyone, and welcome back to the blog this week!
As financial planning experts, M&L staff all agree that the Special Needs Trust (SNT) is perhaps one of the most useful and essential components of a well-rounded special needs financial life plan; we all also agree that it can be one of the trickiest, and that the slightest mistake made while establishing the trust can do far more harm than good to the individual(s) it is intended to support.
Here at M&L, we strive to ensure that our clients, family, friends, and members of the general public are educated as to exactly what the SNT is, how it can be helpful, and the mistakes to avoid when establishing one. So, as promised in our last post, we now take a look at Special Needs Trusts and how they are created. We also focus on a piece of legislation which aims to level the financial playing field: The Special Needs Trust Fairness Act of 2015.
The Special Needs Trust
In the event that you are not familiar with Special Needs Trusts (SNTs), here is a brief summary:
A SNT is a legal document that protects the assets of an individual with a disability by placing funds and other assets under the control of a trustee. It is one of two legal ways for a beneficiary (the individual with a disability) to receive the benefit of unlimited extra income without sacrificing valuable state and federal benefits (the second being the newly approved ABLE accounts).
It is important to note that a special needs trust only works if it is written correctly; a trust which has been established without regard for the eligibility laws may disqualify a person with disabilities from government benefits, specifically from Supplemental Security Income (SSI) and Medicaid. When creating special needs trusts, it is important to always consult professionals experienced with working with families with special needs.
How are SNTs created?
According to the current laws and legislations surrounding special needs trusts, all trusts must be created by someone other than the individual with a disability – a parent, grandparent, guardian, the court, etc. This individual/group must then act as a trustee for the trust.
The trust itself can take one of three forms:
Third Party Supplemental: Assets are owned by another person that establishes the trust, with the person with disability named as beneficiary. This trust can hold any kind of asset belonging to the donor, including a house, stocks and bonds, and other types of investments. The SNT can also be the beneficiary of a life insurance policy. As the funds in this type of SNT were never in the beneficiary’s name, when that beneficiary dies any funds remaining can pass on to other family members, or charity, without having to reimburse the government.
First Party/Pay Back: Assets are owned by the person with disability, and a trust is established by a parent, grandparent, guardian or the court. While the beneficiary is living, the funds in the trust are used for his or her benefit. When he/she dies, any assets remaining in the trust are used to reimburse the government for the cost of his/her medical care, i.e. Medicaid. That is what is referred to by the “payback” provision.
Pooled: The Pooled Trust is a little different from the other two; the trust money is held and administered by a non-profit 501c3, and it also contains a “pay-back” provision. This type of SNT is usually used when there is not enough money for a stand-alone SNT; therefore the non-profit establishes a trust that allows beneficiaries to “pool” their resources for investment purposes. Each beneficiary’s account is maintained separately for that individual’s needs. As with the first party trust, when the beneficiary dies the funds remaining in the account reimburse the government for the beneficiary’s public benefits received. Often, a portion goes to the non-profit for management before the remainder of the funds pass to the beneficiary’s heirs, which in this case is the government.
Special Needs Trust Fairness Act of 2015
As written above, according to federal law, First Party Special Needs Trusts (the most common form of SNTs) must be established by someone other than the individual with the disability.
The Special Needs Trust Fairness Act of 2015, as introduced by Congressman Frank Pallone and Congressman Mike Thompson, is designed to change this – by making a “technical correction to Section 1917(d)(4)(A) of the Social Security Act regarding special needs and pooled trusts under Medicaid, which are exempt from asset counting and transfer rules, to allow non-elderly individuals with disabilities to establish a special needs trust on their own behalf.[i]” In other words, the Special Needs Trust Fairness Act, through changing the language of the trust, would give individuals with disabilities the same rights as parents, grandparents, guardians, or the courts – it would allow individuals with disabilities (who have the capacity) to create their own special needs trusts.
Why is the Special Needs Trust Fairness Act Important?
At ILO, we feel that this legislation is important for a number of reasons; first of all, it increases individual autonomy and self-direction for adults with disabilities. Second of all, many individuals with disabilities may be capable of establishing SNTs on their own, and to force them to rely on other individuals to create these trusts may create undue hardships for those that do not have living relatives or guardians. In that case, they may incur expensive legal fees in order for the courts to intervene.
As Congressman Pallone stated when asked about the bill, “The barriers that currently prohibit an individual from creating a Special Needs Trust, despite having the mental capacity to do so, have no basis in reality and place an undue burden on disabled individuals who are simply trying to make ends meet.”
If you agree, and would like to express your support for this bill (which is currently stalled in the House of Representatives) please visit Congressman Thompson‘s website, or contact your representative.
Would you like more information?
Thanks again for visiting our blog today – we hope that this discussion of special needs trusts was informative, and inspired you to learn more about this important financial tool.
If you would like to learn more about Special Needs Trusts and how they can help your family with special needs, please contact us! We would love to hear from you, and provide you with the guidance that you need to navigate through the financial planning process for your family with special needs. You may also wish to browse through the Resource Page on our website; we have included many websites and contacts that can provide you with valuable information on how to being planning for the future of your family.
Thanks again for dropping by – hope to see you all next week!
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