Private Client Services Update – Special Attention for Special Needs

    By Robert H. Powell III, Estate, Trust & Wealth Transfer

    Imagine the following situation. Sam and Sue are in their early 80s, live in Virginia Beach, and are the proud parents of 3 children. Two of them, Bill and Betty, are grown, married, and between them have produced 6 wonderful grandchildren, all of whom live on the West Coast. Unfortunately, Jack, the third child, is bipolar and has numerous health issues, including impaired vision and serious periodontal disease. Unable to live on his own at 53 years of age, he lives in a group home in Norfolk. Jack receives Medicaid and Supplemental Security Income (SSI), both of which are primary means-tested government benefits.

    Jack’s parents have been supplementing his needs at the group home for things not covered by the benefits he receives. This has included fishing trips and the purchase of fishing equipment. Jack loves to go fishing in the area lakes as well as deep-sea fishing out of Oregon Inlet. They have also been paying for the extensive dental care that he needs as well as regular visits to his optometrist need to deal with a detached retina and macular degeneration. Dental care and eye care are not covered by Medicaid nor are the fishing trips.

    Neither Bill nor Betty wants the responsibility of caring for Jack following Sam and Sue’s death. They have never been close to Jack and they live so far away that they believe it would not be practical for them to assume the responsibility. Sam and Sue want to treat their children equally but they are concerned that leaving one-third of their estate outright to Jack would perhaps not be a wise thing to do. Not only is Jack financially irresponsible; but, additionally, both Medicaid and SSI are means-tested government benefits that could be lost if a portion of their estate is left to Jack.

    In general, there is a $2,000 resource limit for an SSI recipient with cash or other liquid assets, as well as real estate and personal property the person owns being considered as resources. 20 C.F.R. 416.1205(c). Jack’s parents have thought about leaving their estate to Bill and Betty with the hope that they will continue to provide Jack with “the extras” that Jack has been receiving from them – the fishing trips, uncovered dental and eye care, extra clothing, etc. They are concerned, however, that Bill and Betty might decide that the extra funds they get could be better used for the educational expenses their own children and grandchildren are incurring. Sam and Sue also are concerned that the assets transferred to Jack’s siblings would expose those assets to the creditors of the siblings. These are all valid concerns.

    Situations such as this are well suited to the use of a special needs trust (SNT) especially one funded with assets owned by Sam and Sue. This type of SNT is often referred to as a third-party SNT (versus what is generally known as a self-settled SNT) and it can be established by anyone other than the beneficiary or the beneficiary’s spouse. One of the advantages of this type of trust is that it is not subject to the restrictions imposed by 42 U.S.C. 1396 which, among other things, require that any funds remaining in the trust at the death of the beneficiary be used to repay the state up to an amount equal to the total of the medical assistance received by the beneficiary. Also, unlike a self-settled trust, a third-party trust can be created either by will or by a revocable or irrevocable trust.

    It is important to remember that the trust must be drafted and administered carefully and the trustee may only supplement the needs of the beneficiary receiving government benefits. Thus, if the trustee provides distributions to cover items that are or that could be provided under the government program, the eligibility of the beneficiary for Medicaid or other government benefits being received may be lost. The trustee of the SNT, therefore, should not use trust income or principal to provide basic needs such as food or shelter or medical care covered by Medicaid. Trust income and principal should only be used for extra items not provided for under the available governmental programs.

    Under a third-party SNT, assets remaining in the trust at the death of the beneficiary may pass according to the terms of the SNT (Sam and Sue might provide, for example, that the remaining assets pass to Jack’s siblings), or according to the exercise of a power of appointment in the beneficiary’s will. The important thing is that the remaining assets do not have to be used to reimburse the state for the Medicaid assistance received by the beneficiary.

    Several suggestions for Sam & Sue in setting up an SNT are:

    1. Their own estate planning documents should provide that debts, taxes, and expenses of their estates are not to be satisfied out of assets in the SNT. This makes it clear that they want the assets to be used solely for the beneficiary during the life of the beneficiary.
    2. They might want to give the trustee the power to use trust assets for basic needs for food and shelter in the event SSI payments received by the beneficiary are not sufficient to meet those needs. This could result in a reduction in SSI benefits, however.
    3. The trust should limit payments directly to the beneficiary. In many instances, the beneficiary will not have sufficient financial responsibility to handle the distributions. However, in some cases, the beneficiary might be perfectly competent mentally, but might be profoundly physically handicapped and therefore eligible for the government benefits. In either event, distributions directly to the beneficiary from the SNT are treated as income that would reduce government benefits being received. The trust could require that payments be made directly to the vendor or provider of services.

    Where parents or grandparents have a child or grandchild eligible for Medicaid and SSI, a third-party SNT can be a valuable tool for their use to ensure the eligible beneficiary receives the extras they want that beneficiary to receive while not resulting in disqualification to receive the available Medicaid or SSI benefits and without requiring repayment of those benefits from any remaining trust assets at the death of the beneficiary of the trust. Careful drafting of the trust and as well as administration by a trustee familiar with the ins and outs of an SNT are required for this to be completely successful.

    Bob Powell is of counsel in the firm’s Norfolk office where his practice focuses on trust and estate planning, real estate, and corporate transactions. He received his B.S. and LL.B., cum laude, from Washington & Lee University. Bob is AV® rated by Martindale Hubbell and has been designated an Accredited Estate Planner by the National Association of Estate Planning Councils. Bob is also a member of the Legislative Committee of Wills, Trusts and Estates Section of the Virginia Bar Association. Active in the community, Bob’s current civic involvement includes service on the Hampton Roads Estate Planning Council, Rotary Club of Norfolk, Bank of Hampton Roads, and Foundry United Methodist Church. He can be reached at (757) 624.3245 or

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.