What is a Self-Funded Special Needs Trust?
Self-Settled Special Needs Trusts come in two varieties, non-Pooled and Pooled. A non-Pooled Special Needs Trust (also known as a Payback Trust (d)(4)(A) trust, Self-Settled Trust, or a First Party Trust) is established for one Trust beneficiary, and the Trustee can be anyone who is qualified to act as Trustee. This is the kind of Trust most people refer to when they use the term Special Needs Trust. A Payback Trust enables a person with a disability to protect his or her assets if they receive an inheritance or lawsuit settlement, while still preserving their eligibility for essential lifelong supports.
If all the funds in the Payback Trust have not been spent by the time the individual with a disability passes away, the remaining funds are first used to “pay back” the state(s) for the cost of providing Medicaid services to the individual. Following this payback, any remaining funds are distributed according to the trust document. Beneficiaries can leave these funds for family members, friends or charitable organizations.
The Need
Individuals with disabilities who receive public benefits would benefit from having funds in a trust used to maintain their quality of life. When an individual who receives public benefits also receives money, the public benefits may be jeopardized. This situation may arise when the individual receives a personal injury or divorce settlement, an inheritance, or other funds. Regardless of the source of the funds, once the individual has money in his or her own name, the public benefits may be at risk. To protect the public benefits, the excess funds can be placed in a special needs trust. This type of trust is used to supplement, not replace, public benefits such as Supplemental Security Income (SSI) or Medicaid. The trust assets should be used to purchase things that public benefits do not provide, and the trustee should be aware of the impact of any distribution on public benefits.
Requirements for a Payback Trust
- It is for the benefit of an individual with disabilities under 65 years of age.
- The beneficiary is disabled as defined in 42 USC 1382 c(a)(3).
- The trust is established by the beneficiary, a parent, grandparent, legal guardian or court.
- At the beneficiary’s death, any residual funds are first used to pay back the government (one or more states) for any Medical Assistance benefits received by the Beneficiary.
Language of the Trust
To qualify for the favorable treatment accorded to supplemental needs trusts under federal and state law, the trust document must do all of the following:
- show the creator’s intent to supplement — not supplant, impair or diminish — government benefits or assistance for which the beneficiary may otherwise be eligible
- prohibit the trustee from distributing trust assets in any manner that may impair or diminish the disabled individual’s entitlement to government benefits, and
- preclude the disabled individual from authorizing or requesting any distributions from the trust.
Assets That May Be Put in the Trust
The Self-Funded Special Needs trust is for assets and not generally for income, but there are exceptions such as certain annuities that can be paid to such a trust. Funds from the following sources are often placed into a Pay-Back Trust:
- bank accounts
- disability backpay from Social Security
- inheritance, and
- court settlements.
Where do you begin?
This can be simple by following these steps and contacting us today.
- First, we’d encourage you to contact us to better learn how to get started identifying a Special Needs Trust and answering questions you may have.
- Then, if you are opening a Payback Trust, you’ll start by contacting an attorney familiar with drafting special needs trusts. Act works with several attorneys that may be able to assist you and your family. We are happy to provide you with several options as you begin this important process.
We look forward to hearing from you!