Setting aside Money for a Loved One with Special Needs

Today’s blog post continues the series about Special Needs Law.  The blog post on February 19, 2015 gave an overview of the legal issues facing people with special needs.  The blog post on February 5, 2015 discussed hidden problems with the new ABLE accounts.  The blog post on February 26, 2015 discussed sources of income for people with special needs.  The blog post on March 5, 2015 discussed medical insurance for people with special needs.  The blog post on March 12, 2015 discussed how the Social Security Administration requires people with special needs to prove a disability to qualify for Supplemental Security Income (SSI.)  The blog post on March 19, 2015 discussed how the Social Security Administration requires people with special needs to prove financial eligibility to qualify for Supplemental Security Income.  The blog post on March 26, 2015 gave an overview how someone with special needs can get rid of excess resources to become “poor enough” to qualify for SSI and Medicaid.  The blog post on April 2, 2015 discussed how a Special Needs Trust can help shelter excess resources from SSI and Medicaid scrutiny.  The blog post on April 9, 2015 discussed how a Pooled Trust can help shelter excess resources from SSI and Medicaid scrutiny.  The blog post on April 17, 2015 discussed how an ABLE account (when fully implemented by the U.S. Department of Treasury and the various states) can help shelter excess resources from SSI and Medicaid scrutiny.

Today’s post discusses parents, grandparents, and other family members (and, for that matter, anyone) can make money and other assets available to someone with special needs without creating a problem with his or her Supplemental Security Income (SSI) or Medicaid eligibility.

Most parents and grandparents want to name their children and grandchildren equally in their wills.  A child or grandchild who relies on SSI or Medicaid who receives assets (no matter from where the assets come) can lose SSI or Medicaid because of these new assets.  The arrival of the assets can be income, causing the special needs person to fail the income eligibility test.  If enough of the assets remain in the possession of person with special needs a month later, then the person may fail the asset eligibility test.  When the assets are used up, then the person may get back onto SSI and/or Medicaid.  (Giving the assets away to achieve eligibility will be considered an “improper transfer” or “illegal transfer,” which still creates ineligibility for the time period that the assets would have covered.)

So, how do parents and grandparents share their legacies with their loved ones who have special needs?

The most common way to leave a legacy for a loved one with special needs is through a trust.  The person who wishes to make sure that money (or other assets) are available to someone with special needs will set up a trust for the benefit of that loved one.  (If a trust already exists, then the person who wishes to leave money or other assets can transfer the money/assets into the already existing trust.)

First, let’s be clear about something very important.  We are talking about money and other assets that never belonged to the person with special needs.  Such money and assets would be considered “third-party” money/assets because they never belonged to the person with special needs (the first party) who wants government benefits (or may want benefits in the future) from Medicaid and/or SSI (the second party.)

The person who sets aside the money (Let’s call this person the “donor.”) has no legal obligation to set money aside for the person with special needs (Let’s call this person with special needs the “beneficiary” since we’re talking about trusts.)  Because there is no legal obligation to give money or assets to the beneficiary, the donor’s money isn’t subject to a payback requirement like with assets placed in a stand-alone first-party Special Needs Trust or with a Pooled Trust.

So, when setting aside money for someone who needs, or will likely need, Medicaid and/or SSI, the keys are:

  1. To avoid screwing up the beneficiary’s Medicaid or SSI eligibility, and
  2. To avoid wasting the donated assets, like through a payback requirement after the beneficiary dies.

If the donor gives money or assets to the person with special needs, that money and those assets would then belong to the person with special needs.  The money and assets must be considered in determining the eligibility (or continuing eligibility) of that person for Medicaid and SSI benefits.  In other words, giving money or assets to someone on SSI or Medicaid might make that person too “rich” to get SSI or Medicaid.  The person with special needs could be forced to spend the money or assets before SSI or Medicaid would be available for his or her care.  The gift directly to the person with special needs makes the gifted money and assets the property of the person with special needs, and, therefore, subjects them to his or her asset and income limits.  Such a direct gift reduces the costs of the government programs and increases the costs to the family.

A trust, if prepared properly, can hold the money for the person with special needs, as the lifetime beneficiary, without reducing or cutting off SSI or Medicaid benefits.  The trust contents never belong to the beneficiary, so they don’t become “first-party” money.  Because it isn’t first-party money, it isn’t subject to the beneficiary’s control.

The trust must also be written to avoid an obligation to pay out for things that SSI and Medicaid would normally pay.  Many trusts state that they are meant for the health, maintenance, welfare, or support of the beneficiary.  SSI and Medicaid pay for health, maintenance, welfare, or support.  Such a trust would have to pay out for the beneficiary’s benefit before Medicaid and SSI would pay.

To avoid the perception of a payment obligation, the trust should have no payment obligation during the lifetime of the beneficiary.  The best way for a trust to have no payment obligation is to have no “standard” for payment.  (A “standard” for payment is an event or condition triggering a payment obligation, such as health care costs of a beneficiary when the trust says it is for the beneficiary’s health.)  A Wholly Discretionary Trust, in the Ohio Revised Code, is the most often used no-standard trust for this purpose in Ohio (where I work.)

A Wholly Discretionary Trust provides that the trustee (a person other than the person with special needs) can pay out of the trust when he or she wants with complete discretion.  (I wish that the name of the trust were “Completely Discretionary Trust” because people often hear “Holy Discretionary Trust” with some sort of religious meaning rather than “Wholly Discretionary Trust” is the sense of complete discretion.  Unfortunately, the Ohio Revised Code uses the name “Wholly Discretionary Trust,” so that name is pretty much stuck in place.)

With a Wholly Discretionary Trust, the trustee can pay out for a beneficiary when the trustee wants, for any reason or for no reason.  Likewise, the trustee can choose not to pay out of the trust for any reason or for no reason.  For example, a trustee can feel pretty good about life on a sunny day and decide to use the trust contents to buy something for the beneficiary.  Likewise, a Cleveland Browns fan (in a fit of frustration) could easily decide that he or she will pay no money from the trust until the Browns win the Super Bowl (meaning that the beneficiary may never get anything, if the Browns continue to play as poorly as in recent memory.)

Because a trust such as this (if set up properly) has no payback obligation, the trust can be set up to pay out to someone else after the initial lifetime beneficiary (the person with special needs) dies, acting like a will.  The remaining contents of the trust (if any) can go to brothers and sisters, nieces and nephews, parents, grandchildren, or anyone else whom the grantor (the person who initially set up the trust) wishes to benefit.  The remaining contents can go to a charity as well, if that is the grantor’s wish.

Some people call trusts like this “third-party special needs trusts.”  I prefer not to use that label.  Because first-party special needs trusts must have a payback obligation, SSI and Medicaid personnel take notice of anything that is called a “special needs trust.”  I’d rather call these trusts something else to avoid having to clarify (over and over) the difference between a first-party special needs trust that has a payback obligation and a third-party special needs trust that has no payback obligation.  I like to call them “supplemental services trusts.”  (I don’t care if you call one “Bob” or “Stairway to Heaven.”  I just suggest avoiding the words “special needs.”  There’s no legal necessity to avoid those words.  It’s just a suggestion to help avoid confusion.)

As mentioned above, the donor doesn’t need to set up a new trust if one already exists for a particular person with special needs.  Perhaps,for example, one set of grandparents already set up a supplemental services trust for a special needs grandchild as part of the grandparents’ estate plan.  Rather than creating a new trust, the other grandparents can designate that existing trust as the recipient of the money that they wish to set aside for the grandchild.  (The original creators of the trust need not be grandparents.  It can be anyone.  I just used grandparents as an example.)

In fact (absent some serious internal family squabble,) I think it is better to have only one such supplement services trust.  To work properly, a supplemental services trust should be completely separate from the people who set it up.  It must be irrevocable.  Because of the complete separation from a person or a married couple, the trust must pay its own taxes and have its own accounting.  Two separate trusts paying for tax preparation and accounting services wastes money that could have remained in trust for the benefit of the beneficiary with special needs.  To avoid duplicate trusts, the person or couple that sets up a supplemental services trust must make the trust known to other family members and to anyone else likely to wish to set aside money for the beneficiary.

To set aside money for someone with special needs, the most protective vehicle to hold that money is an irrevocable wholly discretionary trust.  This allows a person with special needs to participate in the last will and testament of or a significant gift from a relative, just like the siblings and cousins who do not have special needs.  At the same time, if done correctly, the gift via trust does not take away the Medicaid and SSI benefits on which the person with special needs might rely.

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