About Special Needs Trusts

Self-settled special needs trusts

A self-settled special needs trust is one that is established with the beneficiary’s own assets.  This type of trust is most commonly used in situations where a recipient of public benefits receives a personal injury settlement or inheritance that would otherwise disqualify him from benefits.  While receiving a large sum of money would ordinarily disqualify an ALTCS or SSI recipient from eligibility, special needs trusts provide a way in which recipients can keep their settlement or inheritance, yet remain eligible for benefits.

A complex web of rules controls self-settled special needs trusts.  First off, although this type of trust is established using the beneficiary’s money, a person other than the beneficiary must establish the trust.  Most times, this person must be a court or court-appointed guardian, although the beneficiary’s parent or grandparent may also establish the trust in certain situations.  Also, self-settled special needs trusts must generally include what is called a payback provision, which repays state agencies for benefits upon the beneficiary’s death.  For instance, upon a trust beneficiary’s death, a Medicaid special needs trust repays ALTCS for benefits.  Only after repaying ALTCS is the remainder of the trust assets released according to the terms of the trust.  While these rules are demanding, an Arizona special needs trust attorney can help trustees sort everything out.

Third-party special needs trusts

Third-party special needs trusts are different from self-settled trusts in that one person establishes them for the benefit of another.  Parents of disabled children oftentimes establish third-party special needs trusts, thereby helping the child obtain public benefits while at the same time providing additional support for the disabled child.  And, so long as the trust is drafted properly, the trust will not disqualify the disabled child from any public benefits he or she may receive.  The catch is that the trust document must grant the trustee discretion whether to distribute funds to the beneficiary.  If drafted in this manner, the trust may supplement the child’s benefits without jeopardizing his eligibility.

Unlike self-settled special needs trusts, third-party special needs trusts do not require payback provisions.  Furthermore, they can ordinarily be established without the direction of a judge or a court-appointed guardian.  Nevertheless, third-party special needs trusts are governed by specific rules, and they must be administered according to specific rules as well.  As such, it is always a good idea to involve a special needs trust attorney when establishing such a trust.  A qualified special needs trust attorney should be familiar not only with Medicaid special needs trusts, but also with public benefit rules and eligibility requirements.

Administering a special needs trust

Trustees are bound by fiduciary duties and must be extremely attentive to detail when administering a special needs trust.  They must comply with the language of the trust document itself, as well as with Arizona trust laws.  In fulfilling their obligations, trustees are required to handle tax issues and necessary accountings.  Moreover, as special needs trusts are generally used to help the beneficiary remain eligible for public benefits, trustees should also be familiar with the rules and regulations surrounding ALTCS, SSI or both.  To help with all of this, trustees should recruit a special needs attorney who is familiar with public benefit programs.

Appropriate uses for special needs trust funds

Special needs trusts are ordinarily used to supplement the assistance provided by Medicaid (AHCCCS and ALTCS) or SSI.  Once placed in a special needs trust, funds are set aside for certain uses, and they are not counted for public benefit eligibility purposes.  But, because special needs trust funds can only be used for approved expenses, an inappropriate expenditure may cause the beneficiary to be denied or disqualified from public benefits.  Trustees are allowed to spend trust funds on the following types of expenses:

  • Home maintenance or repair
  • School tuition and books
  • Appropriate entertainment expenses
  • Supplemental caregiver services
  • Trust management expenses
  • Prepaid burial plans
  • Medical services not covered by public benefits
  • Personal care
  • Clothing
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