The Good and the Bad about “First Party” Special Needs Trusts
We work with a lot of clients with disabilities who are receiving public benefits like SSI, Medicaid, Family Care, and public housing. They have been referred to our office because they are about to receive some money. For example, perhaps a relative died and they were the beneficiary of a life insurance policy. Or possibly, they were in an accident and are getting funds from a personal injury settlement. In cases like these, while getting money is usually a very good thing, it can have a negative effect on the person’s eligibility for benefits. It is important to do what we can to to minimize any negative effects. Understanding the issues and rules takes special experience and so often, the original attorney handling your matter will refer you to a “special needs planning attorney” like Carol Wessels and Jessica Liebau in our office.
One of the things we think about is called a “special needs trust.” It is a special kind of trust that is set up with the person’s money. If it is done correctly, the money is not counted against the person as far as their eligibility for benefits. But there are some catches. Here is a quick summary of some of the main things to know:
Not all benefits are affected when you receive money, so it is important to know the options in your specific case.
A trust may not be the only option you have , so it is also important to talk with someone who can explain your options so you can make the choice that is best for you.
If you are acting on behalf of someone who cannot act for him or herself, you have to have the legal authority to do so.
A trust that is set up with money that belongs to the person on benefits is called a “first party” trust. A trust that is set up with money that does not belong to the person is not a first party trust. This article ONLY talks about first party trusts.
The two most common “first party” trusts are a privately drafted trust, where you can choose who will be the trustee, or a “pooled trust” which is run by a non-profit organization. With a “pooled trust” you open an account with the trust and the funds of many people are “pooled” together for investment purposes. They do keep track of your own account separately, however.
THE GOOD: With either type of “first party” special needs trusts, the best part is that the funds in the trust can be used for your needs, and that if done correctly, you do not lose your public benefits.
THE GOOD: Pooled trust accounts are very easy to set up, and so are privately drafted trusts. You just need to work with a lawyer who handles special needs planning. Even though the trusts themselves are complicated, your special needs planning lawyer will make your part easy.
The BAD: The first thing to know is that the trust is irrevocable. This means that once you put your money in it, you cannot change your mind and get it back out.
The BAD: When the funds are in the trust, you are not the final decision maker on how the funds are spent. A trustee is in charge of the trust, and it can’t be you. So you will need to work with the trustee to come up with a plan on how those funds will be used.
The BAD: In most cases, you cannot simply get cash out of the trust account. It is not like a bank account. You don’t just go and withdraw $20. In most cases, the funds cannot be given to you directly, rather they are sent to the places you need, such as paying your cell phone bill or your credit card or your gym membership. When the trust pays things for you, this is called a “distribution.”
The BAD: It usually takes more time to get a distribution to pay something than if you simply were writing a check out of your own account. You really need to plan ahead and be organized.
The BAD: there are some cases where the way the funds can be used is restricted. For example, if you are on SSI, chances are the funds in the trust cannot be used to pay your rent and certain other “shelter” expenses, since that would cause your SSI to be reduced. It is important to go through the things you want the trust to pay, when making your decisions. about whether the trust works for you.
The BAD: When you die, if there are funds left in the trust account, they do not go straight to the people you choose as beneficiaries. First, if you received any Medicaid during your life, the funds go to pay back Medicaid. (Or with a pooled trust they might go to a pool to benefit other people with disabilities.) ONLY if there is enough money in your trust to pay Medicaid AND have money left over, will your beneficiaries get anything.
The Bad: These cost money to administer. First, your lawyer will charge you to set the trust up. Second, there will be tax requirements that will require the use of a professional accountant, and third, a professional trustee will charge a fee. A pooled trust will most likely also charge a fee, since the funds are professionally managed, although some of them charge reduced fees based on the amount in the trust.
Normally, even though the list of the BAD is a lot longer than the list of the GOOD, the two GOOD things are REALLY GOOD. And as long as you learn to work within the limits of the trust rules, you can get a lot of benefit from having a trust. So all in all, the good outweighs the bad. But you need to think these things through and talk about them with your special needs planning lawyer. Let us know if you would like to talk!
