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How Do New Laws Impact Special Needs Trusts?

  • By Ruthann P. Lacey, P.C.
  • |
  • April 18, 2017

A Special Needs Trust allows for the beneficiary to qualify for or maintain eligibility for government benefits like Supplemental Security Income and Medicaid, while maintaining a higher quality of life than would otherwise be possible. In the realm of special needs planning there are two basic types of Special Needs Trusts: First Party Trusts and Third Party Trusts.

First Party Trusts

First Party or “Self-Settled” Trusts are those funded with assets that the beneficiary owns or has a legal right to own. Specific rules apply to the drafting and administration of these Trusts, including the requirement that the Trust pay back to Medicaid at the beneficiary’s death for the value of the health care costs which have been paid by Medicaid on the beneficiary’s behalf over his lifetime.

Because the rate that is paid for care provided to Medicaid recipients is typically significantly less than what the same individual would have paid privately, those reimbursable expenses are generally much less than they otherwise would have been had trust assets been used to provide for the beneficiary’s medical care.

Further, this arrangement is a reasonable and equitable method for providing for the beneficiary’s needs during his lifetime while alleviating some of the burden on the state’s Medicaid programs. Congress viewed this as a win-win scenario for the individual and for the governmental agency.

special needs trust

Third Party Trusts

Third Party Special Needs Trusts are funded with assets that come from a third party. These trusts are often established by a family member as part of an estate plan for a beneficiary with a disability who needs access to government benefits either today or in the future. Because a Third Party Trust is not funded with the beneficiary’s assets, there is no pay-back required.

So as you can see, First Party and Third Party Special Needs Trusts are very different creatures and the rules governing the workings of each type of Trust are strict and strictly enforced by governmental agencies. Some individuals may have both types of Trust; the funds can never be intermingled between these Trusts.

History of Special Needs Trust Law

First Party Special Needs Trusts have been around since Congress specifically provided for their creation in 1993, under 42 U.S.C. §1396p(d)(4)(A). They have been used as planning tools when an individual who needs public benefits has assets that he owns (perhaps assets he accumulated while working), or an inheritance that he is receiving, or a litigation settlement that he is entitled to, which funds would cause him to have too much money to qualify for the benefits he needs.

Under the 1993 statute a First Party Special Needs Trust could be established by the parent, grandparent, or guardian of the person with a disability, or by a court. A competent adult who had a physical disability could not establish his own Special Needs Trust.

This meant that if an individual with a disability did not have a living parent or grandparent, and if he was competent so did not need a guardian, it was necessary to file a Petition with a Court and ask a Judge to sign an Order establishing the Trust. This was costly and often time consuming, waiting for the Judge to determine if a hearing would be necessary, and then to enter the Order.

Changes to Special Needs Trust Law

The governing law has remained unchanged from 1993 until 2016. On December 13, 2016, the President signed the 21st Century Cares Act, which amends 42 U.S.C. §1396p(d)(4)(A)) by adding two words: “the individual.” This (finally!) allows individuals who are competent to establish their own self-settled Special Needs Trusts.

With the new law will likely come confusion, given that there are different types of Special Needs Trusts and different rules that govern each type of Trust. In addition, even if the Trust is drafted and established perfectly, Special Needs Trusts require specialized management due to the legal requirements and strict governmental oversight.

The Trustee must be specially versed in administering Special Needs Trusts and must maintain accurate and complete records in order to ensure compliance with the law and to make sure that the beneficiary does not accidentally become disqualified from the benefits he needs, causing the purpose of the creation of the Trust to fail.

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Author Bio

Ruthann Lacey is an alumna of Trinity College and Emory University School of Law, is licensed to practice law in the State of Georgia and Washington, D.C., and is a Certified Elder Law Attorney. Her practice concentrates on planning for the unique and complex concerns of the elder population, and of children and adults with special needs. Ruthann is a member of the National Academy of Elder Law Attorneys (NAELA), the Special Needs Alliance, a charter member of the Council of Advanced Practitioners, and a member of the District of Columbia Bar, the Georgia Bar Association, and the Atlanta Bar Association. Ruthann has been selected as a “Super Lawyer” every year since 2006; was named one of the Top 50 Women Attorneys in Georgia in 2007, 2009, and 2010; and was included in the “Georgia Trend” selection of Georgia’s Top Attorneys in 2012, all based on surveys of her peers. Ms. Lacey has an AV rating in Martindale-Hubbell, and was included in the 2013 Martindale-Hubbell Bar Register of Preeminent Women Lawyers. Ruthann is past chair of the Elder Law Section of the Georgia Bar, serves on the Continuity of Law Practice Committee of the Georgia Bar, belongs to the Fiduciary Law Section of the Georgia Bar Association, and is a Life Fellow with the Lawyers Foundation of Georgia. She is a member of the Elder Law and Small Firm Sections of the Atlanta Bar Association. Ruthann belongs to the DeKalb Estate Planning Council, is a member of the board of Family Initiative Residences, Inc., and is actively involved with several volunteer and charitable organizations. She is a past Director of the National Elder Law Foundation. Ruthann is an active speaker on the local, state and national levels, to both professional and public groups and organizations. Recent engagements include serving as Program Chair for the fifteenth annual Institute of Continuing Legal Education in Georgia Special Needs Trust program; presenting at the 2015 Missouri NAELA Annual Elder Law Symposium; presenting at the 2015 Georgia Trial Lawyers Association Annual Convention; presenting with the ICLE Webinar Series; presenting at the 8th Annual Utah Elder Law, Estate Planning, and Medicaid Planning 2011 program; presenting at the 9th Annual Utah Elder Law, Estate Planning, and Medicaid Planning 2012 program; presenting at the Stetson University 2011 Special Needs Trusts - The National Conference; serving as a guest Professor of Law at John Marshall Law School; serving on the faculty of Southern Trust School; presenting at the NAELA Symposium and at NAELA Fundamentals Day; facilitating at the NAELA Advanced Practitioner’s Program; presenting to the Alabama Bar Institute for Continuing Legal Education; the Tennessee Bar Association; Medicaid Irrevocable Qualified Income Trust Training; The Coca-Cola Company; the Financial Planning Association; the Cobb County Bar Association Elder Law Section; Emory University's Senior University; Delta Employees Credit Union; the People’s Law School; the Atlanta Bar Association’s Legal Eagles CLE Series; the Atlanta Special Needs Trust Discussion Group; Georgia State University; the Joint Conference on Law and Aging; the Georgia Chapter of the Huntington’s Disease Society; Church groups; Civic groups; Alzheimer’s Support Groups; and AARP Chapters. She also has been an Instructor of Estates, Trusts and Wills and Legal Research at the National Center for Paralegal Training, has drafted Elder Law legislation for submission to the Georgia General Assembly, and is an editor and published writer. Among other accomplishments, Ruthann has been published in the Georgia Bar Journal, Family Law Quarterly (a publication of the American Bar Association), Georgia Probate Notes, Exceptional Parent, Money Matters, Inside Money, Senior News, and NAELA News, edited the Medicaid chapters in A Will is Not Enough in Georgia, contributed to The Complete Idiot’s Guide to Long-Term Care Planning, and The CPA’s Guide to Long-Term Care Planning, has appeared as a guest on the Clark Howard Show, the Layman’s Lawyer, Money Matters, Inside Money, People to People, Professional Review, and Atlanta Issues, has been mentioned in Consumers Digest, has been cited in Elder Care and Nursing Home Litigation in Georgia, and has been quoted in The Wall Street Journal, The Atlanta Journal - Constitution, The Family Connection, and the American Bar Association Journal.