SNT

GOVERNMENT ASSISTANCE AND 
SPECIAL (Supplemental) NEEDS TRUSTS
By Nathaniel E. Clement, J.D. 
AVAILABLE GOVERNMENT PROGRAMS FOR SPECIAL NEEDS PERSONS
The federal government and every state offers some financial assistance to special needs individuals. One type of benefit bases qualification on the disabled person's financial needs. The other type of benefit is based on factors other than need. The programs are federally and state funded. The legislation permits states some degree of control, so the rules and regulations of your home state are very important, and determine the ultimate strategy that may be recommended to maximize benefits.
SUPPLEMENTAL SECURITY INCOME (SSI)
Supplemental Security Income, or "SSI," provides aid to elderly, blind, and disabled persons who are financially needy. This program is administered by the Social Security Administration. SSI makes both outright financial and health care (and medical) assistance available.
Requirements: To qualify for SSI, a person must be unable to engage in any substantial, gainful employment because of a medically established mental or physical impairment that can be expected to result in death, or has lasted or can be expected to last continuously for not less than 12 months.
Benefits: SSI cash benefits currently range from $350 a month upwards. The actual maximum benefit depends on the disabled person's marital status, living arrangements, and income. SSI benefits are reduced as the disabled person's income from any source increases. For health care benefits see Medicaid below.
Cash benefits are forfeited entirely when a beneficiary owns personal resources in excess of $2,000 (some states use a slightly higher asset amount) and receives more than a very modest amount of income, currently about $550 a month. The exact income threshold levels vary from state to state. Note also that "attribution" or "deemed income" rules apply in the determination of income. These deeming rules attribute to the SSI applicant income and resources which in actuality belong to someone else, typically a spouse of a beneficiary or a parent with whom a minor lives. There are exemptions to the assets test. Two important exemptions are a home and a car. This is discussed more below. 
A beneficiary can own a home of any value without loss of benefits - assuming that he or she lives in that house. Certain household possessions, personal effects, and a car are also exempted from the asset limitation. 
Because eligibility is based upon financial need, careful planning for the special child is required to assure that the special child (usually upon becoming an adult) will be eligible for these benefits. Qualifying for SSI is also used as a standard for qualifying a recipient for other assistance programs, such as Medicaid. Some believe that Medicaid is a more important benefit than the cash benefits of SSI, a point that this writer agrees with. Accordingly, it is important that a parent or other family member carefully consider, before making gifts to a disabled family member, whether the gift will inadvertently make their disabled family member ineligible for SSI.
Tests for eligibility are based upon (1) owned assets and (2) income - both earned and unearned. Earned income is salary or wages. Examples of unearned income would be dividends, interest, capital gains and rents. In addition, gifts and direct payments for certain items above specified amounts may reduce or eliminate SSI benefits. Until a disabled child attains age 18, so long as the child is living with one or both parents, the income and assets of the parents are deemed to be those of the child. Once a child reaches 18, however, parental assets are no longer counted.
A beneficiary is permitted to have assets of up to $2,000 (as well as exempt assets) and still qualify for SSI. 
Exempt assets are not counted in the income test. The primary exempt assets are a residence owned by the disabled person and an automobile. A residence includes the residence and all adjacent land, regardless of value. An automobile is permitted because of the need for transportation to work or for transportation for medical needs. No limitation is placed on the value of the automobile . Another item not included in the asset limitation is life insurance and in N.C. up to $10,000 of face value life insurance can be owned. Another exempt asset is a prepaid funeral contract and burial plots. In addition, assets that an individual neither owns nor can convert to cash are not included for purposes of the limitation on assets. Thus, an interest in a nonliquid LLC or limited partnership would be noncountable.
The State of North Carolina now has an estate recovery program in place to help offset the cost of benefits provided a disabled person. Thus, while certain assets are exempt during lifetime, the State reserves the right to recover against the assets at death. Recovery against residences IS being pursued by the State. 
In addition to owned assets, certain direct payments of expenses for basic needs will disqualify a person for benefits. Payments by third parties for food, shelter, or clothing can be disqualifying payments. Gifts of necessaries or direct payments for the benefit of an SSI recipient will reduce benefits dollar for dollar. Thus, when a family member is going to provide payment for necessaries, it can be smart to bunch payments into the smallest time period possible, so as to minimize the loss of benefits.
Payments for nonessential items are not disqualifying. Thus, for example, payments for an item such as a telephone bill is not disqualifying because a telephone is considered nonessential. Payments of over $20 per month will reduce a beneficiary's benefit by an equal dollar amount. Also, earned income by the beneficiary (such as in sheltered workshop settings) will reduce or deny benefits. After a certain exempt amount of income, currently $84, the monthly SSI benefit is reduced by $1 for each $2 earned above that amount.
TRUSTS
Assets in a trust from which benefits cannot be compelled by a beneficiary are not deemed to be owned or capable of conversion to cash by the beneficiary. Significant planning opportunities exist with trust planning that will not prevent a beneficiary from qualifying for governmental assistance. Trusts are discussed more fully below.
MEDICAID
Medicaid is a medical assistance program which is a joint project of the federal and state government. It is administered by each state and has no deductible. Medicaid pays for hospital care, doctor bills, and institutional care in skilled and intermediate care facilities. 
Requirements for Medicaid: Medicaid provides benefits only for persons who meet an income test and an assets test. However, persons who qualify for SSI automatically qualify for Medicaid. 
Programs that provide benefits which are not based on need include Social Security for Disabled Adults, Social Security for Unmarried Children, Medicare, Vocational Rehabilitation, and Veterans' Benefits. These programs are discussed below.
With regard to trust benefits and eligibility for both SSI and Medicaid, it appears that Congress has determined that eligibility tests for SSI and Medicaid benefits would respect the unavailability of income and assets of trusts created by parents for the benefit of their disabled sons or daughters. In certain instances, if a person has certain earned or unearned income, the SSI benefits may be reduced or eliminated, but eligibility for Medicaid benefits may remain.
SOCIAL SECURITY DISABILITY INCOME FOR DISABLED ADULTS
The Social Security Administration provides cash benefits for disabled adult individuals who have worked a specified number of years and who have an earnings record that meets certain tests (i.e. have contributed to the Social Security system the required number of quarters). This program is sometimes called "SSDI."
Eligibility: To qualify for SSDI, a person must have paid into the SS system, have qualify as "disabled" for at least six months, and during that time be unable to have any gainful employment. "Disabled" means an inability to perform any work for compensation. The disabled person must be examined by a doctor selected by Social Security Administration officials before SSDI benefits will be paid. 
A recipient of SSDI is also entitled to Medicare benefits after receiving benefits for two years. Medicare is discussed more fully below.
SOCIAL SECURITY DISABILITY INCOME FOR UNMARRIED CHILDREN
A disabled child can qualify for SSDI on his or her parent's work record. If a child is disabled prior to age 22 and his or her parent is entitled to Social Security benefits (i.e. worked the requisite number of quarters), the child will also be entitled to disability payments beginning upon the death, disability, or retirement of the parent. 
This means many disabled children will someday be eligible for benefits based upon the work record of their parent.
The disabled adult beneficiary who qualifies under the work record of a parent must have a severe physical or mental impairment that began before the age of 22 and that prevents the adult from doing gainful work. The benefits can be as great as 75% of the amount received by the insured parent under Social Security. For example, an autistic adult, who is the son or daughter of an adult is permanently disabled because of an auto accident.
Eligibility: A child who meets the tests above will be entitled to benefits regardless of the value of his or her assets. This program is not income or needs based and therefore, special planning with regard to the assets and unearned income of a disabled child may not be needed to secure SSDI benefits. However, parents or other family members should be aware that Congress is acutely aware of the need to maintain benefit levels when baby boomers begin to retire, and, thus, it is possible that Congress may means-test this program. 
Once a person has been receiving SSDI benefits for at least two years, he or she becomes eligible for Medicare. Medicare, a valuable benefit,&nbsp; is discussed more fully below.
If SSDI benefits are planned as part of the support for a special child it should be remembered that earned income can affect eligibility. Because the program defines disability as an inability by the recipient to perform gainful work, earned income that reaches a certain level will result in disqualification from SSDI benefits. While some level of earnings are permitted without disqualification, earnings above a certain level will reduce the amount of the monthly benefit by $1 for each $2 earned above the limit.&nbsp; Once the beneficiary no longer receives SSDI, he or she is no longer eligible for Medicare. 
MEDICARE
Medicare is a federal health insurance program. It is based on age or status rather than on need. Payments of medical bills are made for individuals and their dependents who are receiving social security retirement or disability payments. 
There are two parts to Medicare. The first part consists of hospital insurance. This is called "Part A." The second part, "Part B," provides medical insurance. 
The Part A hospital insurance under Medicare can be used not only for hospital expenses but also to help pay medically necessary inpatient care in a skilled nursing home (but only for a limited time period) or even for care in a patient's home by a home health agency. 
Part B Medicare medical insurance can help pay for medically necessary physician's services and certain supplies that Part A does not cover. There are certain types of health-related expenses that Medicare will not reimburse.&nbsp; "MediGap" coverage should be purchased by recipients for themselves and for children with disabilities who are covered by Medicare.
SPECIAL NEEDS TRUSTS: A Planning Tool with Promise
Special Needs Trusts (SNTs) are among the most effective legal planning tools to fill the gap between actual needs and what is otherwise provided for by SSI, Medicare and Medicaid.
In order to gain a full appreciation of the benefits of SNTs, let's first discuss the Medicaid eligibility rules. Although Medicaid is a program shared by the federal government and the states. In North Carolina an individual can become eligible for Medicaid benefits when he/she has no more than $2,000 in assets in his own name (excluding certain other exempt resources). If the individual has a spouse residing at home, the spouse is allowed an additional (approx.) $90,000 in assets in her name.
It is not unusual for an individual to have more assets than would otherwise allow him to become eligible for Medicaid benefits. Due to the high costs of health care, and the oft expressed objectives of seniors and disabled persons to remain independent as long as possible and to leave an inheritance to their children, individuals are frequently interested in learning about planning options which might enable them to meet those objectives while simultaneously qualifying for Medicaid. 
The most common option when an individual's assets exceed those allowed for Medicaid eligibility is to "spend down" or deplete the excess assets.&nbsp; If spend down is done the incorrect way, it can result in a very long penalty period, during which the beneficiary does not qualify for Medicaid.&nbsp; Ordinarily&nbsp; when a gift ("transfer") is made to any third-party within 36 months of the date when a Medicaid application is filed, Medicaid imposes a "transfer" penalty period upon the donor. The length of the penalty period is assessed based on the amount of the gift.&nbsp; The penalty period begins when the gift is made, not when the applicant applies for Medicaid benefits.&nbsp; The public policy objective of the penalty period is to discourage people from depleting private assets they would otherwise have had available for their care simply in order to qualify for public benefits. 
In response, individuals have historically attempted to circumvent this restriction by using trusts to hold any assets in excess of Medicaid's limitation under the faulty assumption that trust assets are sheltered from Medicaid attention since they are not legally the personal assets of the individual who might later be filing a Medicaid application. However, because public policy dictated that discretionary trusts maintained for the benefit of the applicant were available to the applicant, courts have frequently determined that such trusts failed to shelter those assets. 
In August, 1993, Congress made significant changes to the trust rules in the OBRA '93 legislation. As a result, current law specifically provides for several types of trusts that are approved by the government for use by individuals who either presently are, or expect in the future to become, eligible for SSI or Medicaid benefits. 
THIRD PARTY TRUSTS
A Third Party Trust is a SNT that is established by a person for the benefit of a person of any age who is presently receiving governmental benefits, such as SSI and Medicaid, or might be expected to receive such benefits. A third party (such as a parent or grandparent) funds the trust with his or her own assets and not with assets of the disabled person. The trust must be structured so payments from the trust are wholly discretionary on the part of the trustee. Some Third Party Trusts absolutely forbid trust funds from being used if a distribution will result in any decrease of governmental benefits. Other Third Party Trusts do allow the trustee to use trust funds for the benefit of the disabled person even though to do so will result in governmental-provided benefits being reduced. This is a matter of counseling with the family.
An ideal use of a Third Party Trust is to make payments for nonessential things. The trustee should attempt to never give cash to the beneficiary (which results in a dollar for dollar offset against SSI), except that the first $20 of cash given the beneficiary (from all sources) is disregarded. These are examples of nonessentials: medical bills, dental bills, podiatry care, telephone and long distance, including cell phones, therapy and counseling, entertainment, cable TV, companionship, furniture, travel, education - tuition, books, fees, automobile or van and all operating costs, including insurance, homeowners or renters insurance, adaptive aids - for example, a wheelchair.
Many people create a Special Needs Trust under a Will or a revocable living trust. This is a particularly attractive planning option in circumstances where a disabled child who will not be able to live independently or one's spouse has a known disability, such as Alzheimer's disease. In such cases it may be appropriate for the parent or the "healthy" spouse to prepare a Will or living trust which establishes a SNT to provide for the disabled spouse, to take effect when the donor or the healthy person dies. 
It is not normally prudent to leave any assets to a disabled beneficiary outright. The SNT solves both of these problems and provides the additional benefits of no transfer penalty period and no pay-back requirement. 
Special Needs Trusts allow for greater flexibility in planning and enable the beneficiary to become or remain eligible for Medicaid benefits while procuring supplemental assistance for which he or she would not otherwise be eligible. 
d4A TRUSTS
There are two other types of trusts that work particularly well when the beneficiary is a disabled individual under the age of sixty-five (there is no age requirements for a Third Party Special Needs Trust). The first type of trust is popularly referred to as a "d4A trust" (it is named for the section in the legislation authorizing its creation). A d4A trust can be established by a parent, grandparent, court, or legal guardian of the disabled beneficiary. A d4A trust is often used to hold the proceeds of an inheritance or a personal injury lawsuit so that the beneficiary can remain eligible for Medicaid benefits. 
A Special Needs Trust is designed so that assets held in the trust can be used to provide for items and services other than necessaries (i.e. other than things like food, shelter, and clothing for the beneficiary). Depending on the beneficiary's age, abilities and circumstances, trust assets could therefore be used to pay for medical treatments, therapy and equipment not covered by Medicaid or other insurance, as well as sitters, trips, movies, computers, and other similar items and services. 
Consider the increasingly common circumstance in which elderly parents facing their own possible need for future nursing home care are simultaneously concerned about arranging for the care of their adult child with a physical or mental disability. Since the statute that provides for the creation of a d4A trust specifically stipulates that there is not a penalty imposed for transferring assets into such a trust, establishing one is a good and particularly effective solution for both generations. By enabling the parent to ensure that sufficient assets are available to provide for the care of such a child who presently or in the future may require public assistance, the d4A trust can be a good planning tool. However, there is a downside to the d4A trust.
The potential downside to a d4A trust is that those assets remaining in the trust upon the death of the beneficiary must first be spent to reimburse Medicaid for those health care costs which have been paid by Medicaid on the beneficiary's behalf. This is not all bad because the rate Medicaid patients can be charged is typically significantly less than what the same individual would have been charged privately; thus, those reimbursable expenses are generally much less than they otherwise would have been had trust assets instead of Medicaid's been used to provide for the beneficiary's medical care. 
d4C TRUSTS
The second type of trust that works particularly well when a beneficiary is disabled and under the age of sixty-five is popularly referred to as a d4C trust, or a pooled-account trust. The d4C trust can be created by a parent, grandparent, court, guardian, or by the disabled individual himself. It is managed by a non-profit association such as LifeSpan in North Carolina or the Georgia Community Trust in Georgia. These organizations the funds of multiple beneficiaries for investment purposes, while maintaining separate accounts for each beneficiary. As with d4A trusts, the assets in the d4C trust can only be used to provide items and services other than food, shelter, and clothing for the beneficiary. At the election of the individual who established the trust, any assets remaining in the trust upon the death of the beneficiary can either be paid to the non-profit entity that managed the assets, or used to reimburse Medicaid. A pooled-account trust is often a good option when the size of the trust estate is insufficient to make it economically feasible to engage a corporate trustee for purposes of managing the trust estate. 
To my knowledge, very few of these types of trusts have been established in North Carolina.
Individuals are wise to take advantage of these options which provide alternatives to many who are most in need of engaging in financial and long term care planning.
&nbsp;
===================================
Copyright, Nathaniel E. Clement, 
J.D.,Counsellor at Law,&nbsp; 2005
1709 Legion Rd, Ste 214, Chapel 
Hill, NC 27517
Tele: 919-929-9298
THIS ARTICLE MAY BE PHOTOCOPIED AND DISTRIBUTED IF COPIED IN WHOLE WITHOUT ALTERATIONS.

RETURN TO ARTICLES EDITOR - TOC