Special Needs Trusts

What Is A Special Needs Trust?

The phrase “Special Needs Trust” is a description of a trust established for a particular type of beneficiary, usually a disabled person.

The most common form is a trust set up by a parent or parents for a special needs child either by Will or in the form of an intervivos trust. The intervivos trust, can be one that is irrevocable currently, such as a life insurance trust or a trust that becomes irrevocable on the death of one of the grantors and which has other beneficiaries, including one or more of the grantors, with a disabled person as a contingent or residuary beneficiary.

When contemplating a special needs trust, the grantor’s intent is usually to provide, in the future, for some or all of the needs of a child who is incapable of managing his or her affairs, usually because of a mental disability, either a developmentally disabled or autistic child or in some cases, a child who has suffered a traumatic brain injury, with the corpus to be managed by someone other than the special needs child. “Child” as used here does not necessarily mean a minor child.

Other special needs trust may be set up to protect personal injury recoveries received by a mentally disabled person, or to make some portion of an inheritance for a disabled person available without preventing that person from receiving government benefits such as Medicaid and SSI.

There are two basic categories of special needs trusts, one involving funds from someone other than the beneficiary and the other established with the beneficiaries funds. The first part of this paper will address trusts created using assets and property that do not belong to the beneficiary, i.e., a trust funded by a parent or life insurance using property and assets owned by the parent or a life insurance policy owned by the parent. Trusts created with the beneficiaries property are discussed later in the paper.

A special needs trust is also a tool that can be used to keep the assets left for the benefit of a special needs beneficiary out of the hands of a court appointed conservator. In the absence of a trust, and in particular, in the absence of a special needs trust, property and income that belongs to a special needs beneficiary, which is managed by a Court appointed conservator is still considered to be the property of the beneficiary and is therefore subject to government benefit spend down rules, look-back rules and estate recovery rules.

The basic framework of any special needs trust, no matter the purpose, is usually similar to all other such trusts, so the discussion that follows is intended to apply to any special needs trust.

Why Do We Need Special Needs Trusts?

There are four primary reasons for considering the creation of a special needs trust when using the property or assets of the grantor, as opposed to the property of the beneficiary.

  1. a special needs trust, with spendthrift language will keep the trust corpus away from the beneficiary’s creditors;
  2. a special needs trust avoids the application of the “look-back” period, now five years in Georgia, that creates a period of ineligibility for Medicaid benefits, beginning on the date that benefits are sought;
  3. a special needs trust avoids the requirement that assets be spent down until the none exempt assets reach $2,000.00; and
  4. a special needs trust preserves the special needs beneficiary’s eligibility for means based benefits, such as Medicaid and SSI.

Who Can Be a Beneficiary of a Special Needs Trust?

While anyone can be a beneficiary of a special needs trusts, creating a special needs trust to benefit anyone other than a mentally disabled person or a person who may become mentally disabled in the near future (such as someone who is beginning to show early stages of dementia) is probably pointless and most likely not beneficial to the beneficiary, since, as explained below, all special needs trusts give the trustee absolute discretion as to whether to pay out anything for the beneficiary and absolute discretion as to the amount of any payment.

The beneficiary of a special needs trust should be a person who, due to a mental disability that is not likely to improve, cannot manage his or her own financial affairs and his or her personal affairs.

Mentally handicapped or developmentally disabled children and persons suffering from dementia and disabling traumatic brain injuries fit the description of a likely special needs beneficiary.

In addition, a special needs trust is most likely to be called for where the person who will fund the special needs trust is contemplating no longer being around to care for or provide for the disabled person.

Special Needs Trusts in Georgia.

Georgia trust law is certainly flexible enough to allow for the creation of a special needs trust or a trust that has special needs clauses. However, a special needs trust is not specifically recognized as a category of trusts, either in the former trust code or the new trust code. O.C.G.A. O.C.G.A §53-12-1, et. seq. [Old – Georgia Trust Act; New – The Revised Georgia Trust Code of 2010]

The only time that a special needs trust is mentioned in the Code is in the spendthrift trust provision found in the new trust code at O.C.G.A §53-12-80 (O.C.G.A. §53-12-28 (old trust code)), and then only in the new trust code, by reference to Federal law, that itself does not specifically provide for a special needs trust as a separate category of trust, but does deal with some of the issues that a potential grantor is probably concerned about. 42 U.S.C. §1396p(d)(4).

The provisions of 42 U.S.C. §1396p(d)(4) (or D4 trusts) present some unique drafting challenges for an attorney who is drafting at creating a special needs trust where the grantor is or may end up being the special needs beneficiary. D4 trusts are discussed in more detail below.

Why Does Someone Want a Special Needs Trust?

Because of the wealth of information available to parents or guardians of a special needs child, the client usually comes to the attorney with a great deal of knowledge and many times has a fair understanding of what he or she is trying to accomplish. Whether or not this is the case with every client, the attorney should have a comprehensive understanding of what drives the desire to create a special needs trust, besides the existence of a handicapped potential beneficiary.

A special needs trust should be considered where (1) someone wants to provide for a mentally handicapped child or adult; (2) where someone wants to provide for someone who can not manage his or her own financial affairs and is not likely to ever have that ability; (3) where a parent wants to, as much as possible, make provisions for a mentally handicapped child, whether that child is still a minor or has become an adult; (4) where someone wants to assure that financial provisions made for the benefit of handicapped child or other handicapped person are properly supervised and managed; (5) where the parent or in some cases a grandparent have other children or natural beneficiaries who they want to make provisions for, while leaving as much available for the benefit of the special needs beneficiary, or (6) where there is a sum of money available from some source that is intended to be used for a disabled person who cannot handle his or her affairs, due to lack of capacity and the grantor wants to keep the money out of the hands of a court supervised conservator and wants some degree of confidentiality or privacy regarding the assets or money.

Generally, what a grantor is trying to accomplish with what ends up being a special needs trust are some or all of the following:

  • provide for a mentally disabled child or loved one, such as a spouse, after the death of the grantor;
  • keep the money left for the benefit of a mentally disabled child or adult beneficiary out of the hands of a conservator or avoid the necessity of the appointment of a conservator with all of the incumbent reports, court supervision, investing limitations and bonding requirements;
  • protect as much of the principal as possible during the lifetime of the special needs beneficiary so that some or all of the income and corpus can be used by the trust for the benefit of the special needs beneficiary for as long as he or she is alive;
  • to preserve some or even all of the principal for the grantor’s other children after the special needs beneficiary dies;
  • to allow the special needs beneficiary to receive as many governmentally provided benefits at the maximum amount allowable during his or her lifetime, without the possibility of spend down rules that render the beneficiary ineligible for the some or all of the benefits, or rules that permit the snatch back or recoupment of some or all of the government benefits paid during the life of the beneficiary after the beneficiary dies; and/or
  • to enhance the quality of life of the special needs beneficiary.

When most lawyers are asked to prepare a special needs trust, the usual intended purpose is to preserve a sum of money or asset for a disable child without risking access to or eligibility for government benefits. While all of the other reasons are valid and should be addressed, the preservation of access to government benefits is the usual driving force behind the creation of a special needs trust.