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Special Needs Planning

Planning for the future of an individual with special needs requires careful and comprehensive consideration of various options since many federal and state benefit programs and services have income limitations and asset restrictions.

If the goal for an individual with special needs is to have a potential source of supplemental income and supplemental care to enhance their quality of life & care without jeopardizing their current or future Medicaid, SSI, or other public assistance eligibility,then one or more of the following types of Special Need Trusts should be considered for the benefit of the individual:

  • Third Party Special Needs Trust
  • Pooled Medicaid Payback Trust
  • First Party Special Needs Trust

A properly created and managed special needs trust does not provide distributions of money or trust property directly to a beneficiary because the distributions would be deemed income that could reduce or eliminate the recipient’s qualification for Medicaid, SSI, or other public assistance.

Third Party Special Needs Trust

Third Party Special Needs Trusts are the most common type of special needs trusts. Third Party Special Needs Trusts should be used if the intended beneficiary is receiving Medicaid, Supplemental Security Income (SSI), or other means-tested public benefits or services. Third Party Special Needs Trusts should also be used if there is a possibility that the disabled individual may receive Medicaid, Supplemental Security Income (SSI), or other means-tested public benefits or services in the future.

Typically, parents fund Third Party Special Needs Trusts needs trust. However, Third Party Special Needs Trusts may be funded by grandparents, other family, and friends of the beneficiary. The trust may not be funded with any funds of the beneficiary or the beneficiary’s spouse. Third Party Special Needs Trusts are not subject to Medicaid payback requirements if the trust is properly established before assets are transferred to the beneficiary and if the trust is properly administered. A third party special needs trust must be solely for the benefit of the individual with special needs. However, the remainder beneficiary may be any one or more individuals or organizations. As a result, this type of special needs trust is the most flexible and preferred type of special needs trust.

The purpose of Third Party Special Needs Trusts is to supplement the beneficiary’s quality of life and services while preserving the beneficiary’s access to and eligibility of public benefits. Third Party Special Needs Trusts also provide other benefits for the beneficiary that are not related to public programs and services. For example, special Third Party Special Needs Trusts provide management of trust property and distributions for the benefit of the beneficiary.

First Party Special Needs Trusts

First Party Special Needs Trusts are only used if the beneficiary is under age 65 and assets funding the trust belong to the beneficiary. This type of trust may be created by the beneficiary, a parent, grandparent, legal guardian, or court. First Party Special Needs Trusts are appropriate when the beneficiary’s own assets are used to fund a special needs trust. This type of trust is more restrictive than a Third Party Special Needs Trust because First Party Special Needs Trusts must contain Medicaid payback provisions. As a result, upon the death of the beneficiary, any unused trust property must first be used to payback any government services or benefits received by the beneficiary. If any trust property remains after all payback have been properly made, then the trust property passes to the remainder beneficiaries in the trust. This type of trust is often referred to as a “d(4)(a) trust” from section 1396pd(4)(a) of 42 U.S.C. First Party Special Needs Trusts also provide other benefits for the beneficiary that are not related to public programs and services. For example, First Party Special Needs Trusts provide management of trust property and distributions for the benefit of the beneficiary.

Pooled Trusts

A less common type of Special Needs Trust is a pooled trust or Community Trust. Each state offers a type of pooled or community trust. Pooled Trusts can be appropriate when the beneficiary’s own assets are used to fund the trust for the benefit of the beneficiary. These types of trusts are called “Pooled Trusts” because the funds contributed to the trust are for the benefit of the beneficiary, but the funds are pooled with the funds of other persons. The Pooled Trust funds are managed by a non-profit association as a single Pooled Trust fund. The funds contributed by or on behalf of a disabled beneficiary are tracked as a sub-account of the Pooled Trust fund.

During the beneficiary’s lifetime, earnings of the Pooled Trust attributable to the disabled beneficiary’s sub-account are generally available for the Special Needs of the beneficiary. These earnings are typically applied in accordance with directions from the beneficiary’s family members involved in transferring resources to the Pooled Trust. Upon the death of the beneficiary, any assets of the deceased beneficiary remain in the Pooled Trust to provide resources for other beneficiaries and to pay for trust operating costs. Pooled Trusts are approved under Section 1396pd(4)(c) of 42 U.S.C. and are significantly more restrictive than other types of Special Needs Trusts.

Special Needs Trusts Administration

Administration of Special Needs Trust is rather complex. Generally, only persons or institutions familiar with administering Special Needs Trusts should be appointed as the Trustee. Since the objective of the Trust is for the beneficiary to preserve certain benefits and services, the Trustee must administer the Trust in a strict manner that complies with the requisite rules and regulations pertaining to public benefits. For example, it is critical that Trust distributions are made in a manner that maintains the beneficiary’s Medicaid and SSI benefits. Accordingly, the Trustee must possess the knowledge and an understanding of all the rules pertaining to each public benefit program to which the beneficiary is or may become entitled.

In addition to specific knowledge of public benefits law, the Trustee must also possess the knowledge and understanding of the nature of the beneficiary’s disability and the needs of the beneficiary. The Trustee of a Special Needs Trust must also comply with the Trustee’s duties and obligations under state law and in accordance with the terms and provisions of the trust instrument. Lastly, the Trustee must also comply with important Trust administration Rules and principles such as Trust tax laws, the Prudent Investor Rule, and the Principal and Income Act. The Trustee may assist the beneficiary and the beneficiary’s family with applying for programs and benefits.

Medicaid

Medicaid programs provide health benefits and services for individuals with disabilities. Medicaid also provided benefits and services for low income parents, children, and seniors. It is estimated that approximately 3 million individuals qualify as medically needy Medicaid recipients. Medicaid provides qualifying individuals access to basic medical services, hospital care, prescription drugs, and long-term care services. Medicaid programs are state specific and based on federal law. In North Carolina, Medicaid (or Health Choice) may be available to people who are:

  • Blind or disabled
  • Infants and children under the age of 21
  • Low-income individuals and families
  • In need of long-term care
  • Age 65 or older
  • Receiving Medicare

Medicaid eligibility is subject to income and asset tests. Persons who receive any of the following are automatically eligible for Medicaid benefits: Supplemental Security Income (SSI), Work First Cash Assistance, and State/County Special Assistance for the Aged or Disabled.

Medicaid Waivers

Medicaid waiver programs provide individuals with disabilities Medicaid coverage for long-term care community services available in-home or in assisted living facilities. Medicaid waiver programs provide states with flexibility to operate Medicaid programs. Home and community-based waiver programs allow states to offer various medical and non-medical services to qualifying persons. Spouses and parents of minor children cannot be paid service providers, but other family members and friends may be paid providers of waiver services. Examples of types of services that be covered under Medicaid waivers include: case management, respite care, supportive home care, nursing services, transportation, adult day care, supported employment, consumer directed services, living skills training, counseling, therapies, home health aide services, personal care services, meal services and pre-vocational service, among others. North Carolina has several waivers including:

  • Comprehensive Waiver
  • Supports Waiver
  • CAP Choice – IP
  • CAP / DA
  • Community Alternatives Program (CAP) for Children
  • Innovations Waiver
Supplemental Security Income (SSI)

Supplemental Security Income (SSI) provides income to qualifying persons who are at least 65, blind, or disabled. SSI is a means-tested federal welfare program administered by the Social Security Administration (SSA). SSI is established under 42 U.S.C. § 1381. SSI regulations are located in Title 20 Part 416 of the Code of Federal Regulations (CFR) and SSI operating procedures are located in the SSA Program Operating Manual System (POMS).

Social Security Disability (SSDI)

Social Security Disability (SSDI) is an insurance program. The definition of disability for claims under SSDI is the same as the definition for claims under SSI except in cases involving children. It is “the inability to do any substantial gainful activity due to any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months.” Thus, to qualify, the person must have a severe impairment that makes it impossible to perform his or her previous job or any other substantial gainful activity. For persons under 18, disability is defined as a medically determinable physical or mental impairment which results in “marked and severe functional limitations.” The determination of disability may be based on an intellectual disability, mental illness, autism, Alzheimer’s, traumatic brain injury, or other cognitive mental disorders. The determination of disability is the same for the Social Security Administration (SSA) disability programs and Supplemental Security Income (SSI).

Medicare

Medicare is an insurance program not a welfare program like Medicaid. Medicare pays the medical costs of eligible beneficiaries (persons over age 65). Medicare pays for acute care, hospitalization, limited skilled nursing care, doctor’s fees, prescription medications, and medications used in the hospital and home care under certain circumstances. Since Medicare is a federal program, Medicare benefits do not vary among states. Generally, to be eligible for Medicare, a person must be 65 years or older and meet another criterion such as:

  • Eligible for Social Security or Railroad Retirement Benefits;
  • Either a spouse or surviving spouse of an individual who is or was eligible for Social Security or Railroad Retirement Benefits;
  • Divorced from an individual who is or was eligible for Social Security or Railroad Retirement Benefits and whose marriage lasted at least 10 years and is not remarried;
  • An employee of state or local governments hired after March 31, 1986; or
  • Receiving certain Social Security Disability or Railroad Retirement Disability Benefits
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