A Primer On Special Needs Trusts


A special needs trust is a trust created for the benefit of a disabled individual to provide for his or her supplemental needs (beyond basic support, housing, and medical care) and preserve his or her eligibility for means-tested public benefits, such as Medicaid and Supplemental Security Income (SSI).  The use of special needs trusts in estate planning and asset protection planning has grown rapidly over the past two decades as the applicable law has developed and public awareness has increased.

As a starting point, it is important to understand the basics of Medicaid and SSI.  Medicaid is a joint federal-state program that provides comprehensive medical and long-term care coverage to disabled individuals.  SSI is a federal program that provides basic income to disabled individuals.  In many cases, Medicaid and SSI are the sole or primary sources of medical coverage and income to a disabled individual who is unable to work.  However, Medicaid and SSI are means-tested, meaning an applicant must meet financial eligibility criteria.  One criterion is that an applicant’s countable resources (the value of non-exempt assets) cannot exceed $2,000.  Non-exempt assets owned directly by the applicant are countable resources, but non-exempt assets held in a trust for the benefit of the applicant are also countable resources unless the trust meets certain legal requirements set forth in federal and state law.  A special needs trust is a trust that meets these requirements.

There are two general categories of special needs trusts, third-party settled and self-settled.  A third-party settled special needs trust is created by someone other than the disabled person and funded with assets that never belonged to the disabled person.  This type of trust is typically created by parents for a disabled child, although other family members can create or place assets into such a trust.  For assets in this trust to be non-countable, the disabled beneficiary cannot serve as trustee, cannot have the right to withdraw assets from the trust, and distributions may be made to the disabled beneficiary only in the sole and absolute discretion of the trustee without an ascertainable standard such as health or support.  A common way this is stated is that the trust is intended to “supplement, not supplant, impair, or diminish” public benefits to which the disabled person may otherwise be entitled.  The trustee has discretion to make distributions for almost any purposes to the extent such needs are not being provided for by Medicaid or SSI, including for supplemental medical care, entertainment, transportation, travel, and retrofitting of a house or vehicle.  In addition, Ohio law provides that a trust that is otherwise determined to be countable will not be countable if it contains a provision requiring that, if the trust is ever determined to be countable, the trustee is required to terminate the trust and distribute the assets to someone other than the disabled person.  This is known as a “poison pill” and is never intended to be used but is included to provide belt and suspenders protection.  Importantly, a third-party special needs trust does not have to include a Medicaid payback provision requiring that the State be paid back for the value of the Medicaid benefits upon the death of the disabled person.  Rather, at the death of the disabled person, the remaining trust assets may be distributed to other family members or in any manner desired by the settlor.

Conversely, a self-settled special needs trust is funded with assets belonging to the disabled person rather than a third-party.  A disabled person may have assets if they become disabled later in life after having worked, or where they inherit money or receive a lump-sum through a personal injury verdict or settlement.  Prior to 1993, there was no clear authority for such assets to be placed into a special needs trust to preserve Medicaid or SSI eligibility.  However, the 1993 Omnibus Budget Reconciliation Act (“OBRA”) included a provision that expressly authorized two types of trusts for this purpose.  The first type, commonly known as a (d)(4)(A) trust, is a trust created by the disabled individual with assets belonging to such individual that contains a provision requiring that at the death of the individual the trustee must reimburse each State for the value of Medicaid benefits provided to the individual.  This is known as a Medicaid payback and a key aspect of a self-settled special needs that differentiates it from a third-party settled trust.  The second type of self-settled trust is known as a (d)(4)(C) or pooled trust.  This is a pooled trust created by a non-profit organization that holds assets in a pool for a group of disabled persons.  This type of trust also has a Medicaid payback provision, although most pooled trusts allow the disabled person (or their representative) to elect to have the remaining assets stay in the pooled trust or pass to a designated charity instead.  Although not included in the OBRA statute, subsequent regulations have made it clear that a (d)(4)(A) and d(4)(C) trust must be wholly-discretionary and may not allow distributions for the health or support of the disabled person or contain certain other provisions that may circumvent the intent of the law.

There is no boilerplate or one-size-fits-all approach to special needs planning.  In some cases it may be necessary to use both a third-party settled special needs trust and a self-settled Medicaid payback trust.  It is also often advantageous to use complimentary planning techniques, such as an ABLE account (known as a STABLE account in Ohio), the purchase of exempt assets, the purchase of Medicaid-compliant annuities, and gifting strategies that take into account and avoid the pitfalls of the five-year lookback period.  The attorneys in the Estate Planning and Probate Practice Group at Kohnen & Patton LLP have significant experience with all aspects of special needs planning and will be happy to answer questions and discuss these issues with you upon request.