Special Needs Trusts:
How to Write Them
and How to Use Them
Presented By:
Martha C. Brown, Esq.
Russell A. Fracassa, Esq.
What is a Special Needs
Trust?
 Also
known as a supplemental
needs trust
 To
“supplement,” not replace,
public benefits for disabled
person
What is a Special Needs
Trust?
this context – any type of
disability as defined by Social
Security at 42 USC 1382c(a)(3)
 In
What is a Special Needs
Trust?

Different forms of SNTs codified in
Omnibus Budget Reconciliation Act in
1993 (OBRA ’93)
Self-Settled or 3rd Party
 Inter vivos or Testamentary
 Facts and Circumstances will
determine type of trust

What is a Special Needs
Trust?

Three types of SNTs
(d)(4)(A)
 (d)(4)(C)
 Third Party SNT

What is a Special Needs
Trust?
Trust Type
(d)(4)(A), SelfSettled
(d)(4)(C), Pooled
Third-party SNT
Established by
Parent, Grandparent..
Individual, Parent…
Other than disabled
Assets Funding
Disabled person
Disabled person
Third person
Beneficiary
Disabled person only
Disabled person
Anyone
Grantor Trustee
No
No
Yes
Distributions
To third parties
To third parties
To third parties
Payback
Yes
Yes
No
Disability
SSA Definition
SSA Definition
SSA Definition
GiftTax Exclusion
Cannot use
Cannot use
Can use
Testamentary
No
No
Yes
Age Limit
Funded by 65
No (check state)
None
Frequent used for
PI or Inheritance
Same but lesser
Any use
Drafting Considerations
Not just a form
 Risks

Loss of client benefits
 Attorney malpractice

Drafting Considerations
Grantor trust provisions for income tax
 See I.R.C. §§671-679
 Net income taxed to beneficiary



Not on the IRS Form 1041
Typically lower tax rates
Know the Public Benefits
Supplemental Security Income (SSI)
 Social Security Disability Insurance
(SSDI)

Know the Public Benefits

Supplemental Security Income (SSI)

Needs Based
• Limited income and assets
Know the Public Benefits

Supplemental Security Income (SSI)

Medicaid Qualification
• Some states is automatic qualification
• MO, not – still have Medicaid qualification
• Less than $1,000
• Non-countable resources
• Home
• One car
• Pre-need burial agreements…..
Know the Public Benefits

Social Security Disability Insurance
(SSDI)
Not means-tested
 No financial eligibility requirements
 Medicare Qualification

• 24 months after receiving SSDI
• Some exceptions to the waiting period
Distribution Standards
Discretionary vs. Support
 Discretionary



Support


No standards for trustee discretion
Support requirements
UTC – Distinction eliminated

Support trusts are discretionary trusts
with support standards
Distribution Standards
Should only contain pure discretionary
distribution standards
 Not give a beneficiary any right to
compel a distribution
 Trustee to have “sole,” “uncontrolled,”
“absolute” discretion

Distribution Standards
Avoid toxic language as “support and
maintenance”
 Avoid “Health, education,
maintenance and support” language
 Highly recommended to spell out
grantor’s intent to supplement and not
to supplant public benefits

Choice of Trustee
Family members often have little
fiduciary experience
 Family members often do have
superior knowledge of the disabled
person
 Educate family member trustee
 Utilize co-trustees include a family
member
 Courts may desire or require
professional trustees

Distributions from the Trust
Concept of “in-kind support and
maintenance” (ISM)
 Payments for necessities of life such
as food or shelter
 Treated as income to beneficiary
 Dollar-for-Dollar reduction in benefits


Limited to one-third
POMS


Social Security Administration’s Program
Operations Manual System (POMS)
Many changes and clarifications in 2009
POMS

Changes affecting drafting







Spendthrift clause – required
Revocation & termination – available
Child support & maintenance – not income
Payback – cannot be limited to time
Sole benefit – no other persons to benefit
Legal authority to establish the trust required
Seed trust
POMS

Changes affecting administration





Distributions that are income
Distributions that are not income
Distributions not for the benefit of beneficiary
Distributions for credit cards
Distributions for Gift Cards/Certificates
Pooled Trusts

Transfers




As of today, no penalty for transfers
occurring at any age
Sole benefit
Account may be established by beneficiary
Payback provision