I. HISTORY OF SPECIAL NEEDS TRUSTS
In the past, parents with disabled children had only two options - disinherit the children so they would not lose public benefits or leave enough money in a traditional support trust so the children would not need public benefits.
In the 1980’s and early 1990’s, case law developed which allowed a parent to create a trust for a child with disabilities that would be insulated from the government and allow the child to remain eligible for public benefits. (See end of outline for case cites.)
The Special Needs Trust (SNT) allows individuals with disabilities to receive public benefits, but still have funds to supplement those benefits, enhance the quality of their lives, and improve their situations. The SNT can be used to provide better housing, private caregivers, and advanced medical treatments. It can even be used to provide for vacations, YMCA memberships, and trips downtown for baseball games.
The SNT has been used to provide a better quality of life for persons with varied disabilities, including physical disabilities, mental disabilities, mental illness, and even blindness.
This article begins by explaining the various types of SNT’s, provides some drafting suggestions, and ends by explaining how the most common public benefits inter-relate with the SNT.
These trusts have been called "Special Needs Trusts", "Supplemental Needs Trusts", or "Phillips" trusts. They are also sometimes referred to as "OBRA ‘93" trusts, "d4A" & "d4C" trusts.
The current statutory law can be found at:
760 ILCS 5/15.1
305 ILS 5/5 -2.1a
405 ILCS 5/5 - 105
89 Ill. Admin. Code Sect. 120.347 (1995)
42 U.S.C. 1396 p(d)(4)(A)-(C) - from the Omnibus Budget Reconciliation Act of 1993, hereinafter "OBRA ’93"
II. THREE VARITIES OF SNT’S
Just as ice cream comes in different flavors, the SNT comes in three different varieties. All three varieties function the same during the beneficiary’s lifetime – they supplement public benefits. However, the differences are found in who creates the trust, who acts as trustee, and what happens after the death of the beneficiary.
A. Third Party Created SNT
This trust is governed by 760 ILCS 5/15.1.
This is a trust created with assets that belong to someone other than the individual with the disability.
EXAMPLE: A parent’s will includes a SNT for a child with a disability, so that the parent is funding the trust at death, for the benefit of the child.
EXAMPLE: A grandparent creates and funds a SNT for a grandchild with a disability during the lifetime of the grandparent.
NO PAYBACK: Upon the death of the beneficiary, the funds do NOT pay back to the state.
B. Self-Settled SNT
This trust is governed by 42 U.S.C. 1396 p(d)(4)(A) and 760 ILCS 5/15.1.
"A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter." 42 U.S.C. 1396p(d)(4)(A)
This trust is funded with assets belonging to the individual with a disability, or assets to which that individual is entitled to receive, when that individual is under 65 years of age.
The trust must be created by a parent, grandparent, guardian, or the court. (If there is no living parent or grandparent, you will need the court to establish the trust.)
One may choose an individual or corporate trustee. Either way, one will need the services of someone who is familiar with public benefit programs and how they will inter-relate with the trust. As a resource, one non-profit organization that provides trustee services, and trustee advising services, is:
Life Management Services
555 E Butterfield Road, Suite 301
Lombard, IL 60148
PAYBACK: Upon the death of the beneficiary, any funds remaining must first be paid back to the state for the amount of Medicaid received. Then, the balance may be distributed as outlined by the Settlor of the trust.
EXAMPLE: A person (under age 65) is injured in a car accident and receives a personal injury settlement – the PI attorney should be working together with an SNT attorney so that the court order for the settlement can be paid directly into a SNT.
EXAMPLE: Parent leaves an inheritance outright to a child with a disability (under age 65) – the probate attorney should petition the court to create a SNT and direct the inheritance to be paid directly to the SNT. This needs to be a payback trust because the beneficiary is entitled to the funds outright.
EXAMPLE: Sister leaves an inheritance to a brother with a disability (under age 65) in a basic support trust – the trust attorney should petition the court to reform the trust to a SNT.
EXAMPLE: Individual with a disability (perhaps M.S., perhaps mental illness) (under age 65) had been employed and received private insurance through employer, but now has lost the job and lost the insurance, and wants to apply for Medicaid. The individual may move all his assets into a SNT and apply for Medicaid. In order to use the "Self- Settled" SNT, he needs to have a parent, grandparent, guardian or the court create the trust for him. If there is no living parent or grandparent, and he wants to avoid court, he should consider the "Pooled Trust" explained below.
C. Pooled Trust
This SNT is governed by 42 U.S.C. 1396p(d)(4)( C).
This trust is funded with assets belonging to the individual with a disability, or which the individual is entitled to receive. The individual may be any age.
The trust may be created by a parent, grandparent, guardian, the court, or the individual. (So, if the individual has capacity, or has a POA, he can avoid going to court.)
The Trustee must be a non-profit organization. The Trustee creates the trust, an individual joins the trust through a "Joinder Agreement." Funds are pooled for investment purposes, but each beneficiary has his own sub-account. The three Illinois organizations currently available are:
Illinois Disability Association 135 So. LaSalle Street, Suite 1760
Chicago, IL 60603
Life’s Plan, Inc.
2801 Finley Road
Downer’s Grove, IL 60515
Options for Living
St. Charles & Rock Island locations
630-584-0043 or 866-331-0043 (toll free)
PAYBACK: Upon the death of the beneficiary, any funds remaining in the trust must either:
(1) First pay back to the state for the amount of Medicaid received, with the balance distributed pursuant to the terms set out in the Joinder Agreement; or
(2) All funds remain in the Pooled Trust to benefit other individuals who are members of the trust.
EXAMPLE: All of the same situations as the Self Settled Trust, but the beneficiary may be any age. For example, a person under age 65 who does not have any living parents or grandparents may choose the Pooled Trust in order to avoid a court proceeding to establish the trust.
EXAMPLE: Person over age 65 who moves to a nursing home and applies for Medicaid. While the trust has a payback, it is at the Medicaid daily rate, which is lower than the daily private pay rate.
III. KEY DRAFTING NOTES
• Cite Federal and Illinois statutes to show intent
• Distributions should "Supplement" public benefits
• Never use the word "Support" – may destroy the protection of the SNT because the Restatement of Trusts allows a beneficiary to go to court to force distributions from the trust
• Be careful with mandating that the trustee can never make any distribution that would reduce or replace public benefits – some states require this but Illinois does not – it may be better to give the trustee discretion to reduce certain public benefits if it results in a better quality of life for the beneficiary
• In most cases, no cash distributions outright to the beneficiary, but if the beneficiary is financially responsible, the trust can take out a credit card for the beneficiary to use
• Self-Settled and Pooled Trusts must be irrevocable (but see limited power to amend below)
• Third Party Trust may be revocable – but be sure to understand the public benefits and any trust requirements they may have
• May give trustee or trust protector the power to amend to keep the trust consistent with the drafter’s intent and changes in the law
• Pre-pay funeral and burial in a Self Settled and Pooled Trust because there may not be any funds left for burial after the Pay Back
• If client is under guardianship in Cook County (and perhaps other counties), judges want trust provisions that reflect guardianship laws
• If a Self-Settled trust is created by a parent or grandparent for the benefit of a person who is receiving SSI (defined below), Social Security will require the parent or grandparent to place a minimal amount into the trust prior to transferring the child’s funds into the trust (ex. $10.00).
IV. COMMON PUBLIC BENEFITS
When a client begins asking questions about protecting public benefits, the attorney must first determine what type of public benefits are involved. The terminology can be confusing for our clients, and each benefit inter-relates with the SNT in different ways. The main benefits the SNT attorney should be concerned with are Medicaid and SSI (defined below). The attorney needs to have a good working knowledge of Medicaid and SSI. If clients are receiving Medicare and SSDI (defined below), they may still wish to establish a SNT in the event they will apply for Medicaid in the future. Other benefits not covered here but of potential concern are: Medicare Part D, HUD Section 8 housing benefits, food stamps, veterans benefits, and other state or county benefits that are based on asset or income limitations.
A. Medicaid versus Medicare
Many clients confuse Medicaid and Medicare. You may need to ask them some questions to ensure you understand which program is actually providing benefits to the individual.
Medicaid is a needs-based poverty program. The individual must have $2,000.00 or less in assets. For example, an inheritance or P.I. settlement will cause the individual to lose Medicaid benefits if the funds are not placed into a SNT.
Medicare is an entitlement program, based on work history or other eligibility criteria. Owning excess assets would not affect Medicare.
B. SSI versus SSDI
Many clients will tell you their child is receiving "social security." When you ask them if it is SSI or SSDI, they usually do not know. Both programs are administered through the Social Security Administration. You may need to ask some questions in order to determine which type of benefit the person is receiving, or if the person is receiving both benefits.
SSI = Supplemental Security Income
This is a needs-based poverty program. The individual must have $2,000.00 or less in assets, as well as limited income. Social Security provides a periodic review, asking questions about assets and income. For example, an inheritance or P.I. settlement will cause the individual to lose benefits if the funds are not placed into a SNT.
SSDI = Social Security Disability Income
This is an entitlement program, based on work history. The periodic review will ask questions related to the disability, but not about the assets of the beneficiary. Owning excess assets would not affect SSDI.
DAC = Disabled Adult Child; CDB = Childhood Disability Benefit
This is a form of SSDI that is paid to a child who is disabled before age 23, based on the parent’s work history. The child may begin to receive benefits upon the parent’s death, retirement or disability. The child may continue to receive SSDI into adulthood if they do not marry. There is no asset limit, but may be an income restriction.
As a word of caution, the Social Security Administration is continually changing their rules on Special Needs Trusts, and their caseworkers are often not familiar with these trusts, leading to problems for our clients. In addition, there are strict regulations on how an attorney can bill for representing a client in a Social Security appeal.
C. SSI And the "food and shelter" requirement
The purpose of the SSI benefit is to provide for a person’s food and shelter. (Clothing has been removed from the SSI regulations.) If the person receives these items from an outside source, the SSI rules deem that as "income", and the person’s benefit check is reduced. If SSI is reduced to zero, the person may lose MEDICAID benefits.
The SSI deemed income rules are as follows:
(1) Disbursements of cash directly to the beneficiary will reduce the recipient’s benefits dollar for dollar until the SSI payment is totally eliminated, which may then result in the loss of the recipient’s valuable Medicaid medical coverage;
(2) Disbursements from a SNT for purposes other than food or shelter will not reduce a beneficiary’s SSI monthly payment as long as that disbursement is made directly to a third party; and
(3) Disbursements from the SNT for the benefit of the recipient directly to third parties for items of food or shelter (referred to as "In Kind Support and Maintenance") will result in a reduction of an SSI monthly payment, but generally not beyond the "presumed maximum value" (which is approximately one-third of its original amount).
Therefore, if the trust is drafted correctly, the funds may be used to raise the quality of life for the beneficiary. For example, the trust could be used to purchase a group home where the beneficiary could live with other individuals who have similar disabilities. The trustee would need to know the amount of SSI the individual receives, and to what extent it would be reduced by having the trust provide housing, but a well drafted SNT would provide this flexibility to the trustee.
In conclusion, the SNT is a wonderful tool that has helped many families improve the quality of life for their loved ones, and ensured peace of mind for parents who are concerned about what will happen with their children with disabilities after their deaths.
For more information on the topic of SNT’s, the following resources are recommended:
1. Darcy J. Chamberlin, The Basics of Self-Settled and Third Party Special Needs Trusts, IICLE, Elder Law Short Course 2005, Section 3 (November 3&4, 2005).
2. Darcy J. Chamberlin, Drafting Self-Settled and Third Party Special Needs Trusts, IICLE, Elder Law Short Course 2005, Section 6 (November 3&4, 2005).
3. Clifton B. Kruse, Jr. Third Party and Self-Credited Trusts, Third Edition, American Bar Association.
4. L. Mark Russell and Arnold E. Grant, Planning for the Future: Providing a Meaningful Life for a Child with a Disability after Your Death, Planning for the Future, Inc., Fifth Edition, 2005 (www.specialneedslegalplanning.com).
5. Stetson University College of Law, seven years of Annual CLE’s on SNT’s.
Dept. of Mental Health and Developmental Disabilities v. The First National Bank of Chicago, 104 Ill.App.3d 461 (1st Dist. 1982).
Department of Mental Health and Developmental Disabilities v. Phillips, 114 Ill.2d 85 (1986).
Tonya Gabbard is an attorney with The Elder Law Office of Steven C. Perlis and Associates, P.C.