Special Needs Trusts.txt

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SPECIAL NEEDS TRUSTS: 
WHEN AND HOW TO 
USE THEM 


Sponsor: Probate & Trust Law Section 
CLE Credit: 1.0 
Thursday, June 17, 2010 
3:10 p.m. - 4:10 p.m. 
Thoroughbred Meeting Room 4 
Lexington Convention Center 
Lexington, Kentucky 



A NOTE CONCERNING THE PROGRAM MATERIALS 

The materials included in this Kentucky Bar Association Continuing Legal 
Education handbook are intended to provide current and accurate information 
about the subject matter covered. No representation or warranty is made 
concerning the application of the legal or other principles discussed by the 
instructors to any specific fact situation, nor is any prediction made concerning 
how any particular judge or jury will interpret or apply such principles. The proper 
interpretation or application of the principles discussed is a matter for the 
considered judgment of the individual legal practitioner. The faculty and staff of 
this Kentucky Bar Association CLE program disclaim liability therefore. Attorneys 
using these materials, or information otherwise conveyed during the program, in 
dealing with a specific legal matter have a duty to research original and current 
sources of authority. 

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TABLE OF CONTENTS 


The Presenter ........................................................................................................ i 
Moral of This Presentation....................................................................................1 
What is a Special Needs Trust (Sometimes Also Called 
Supplemental Needs Trust)?................................................................................1 
How Can Trust Funds Be (or Not Be) Used?........................................................8 
Who May Serve as Trustee of a Special Needs Trust? ......................................11 
Conclusion ..........................................................................................................13 



 
THE PRESENTER 



Jefferey M. Yussman 
Wyatt Tarrant & Combs 
2700 PNC Plaza 
500 West Jefferson Street 
Louisville, Kentucky 40202 

(502) 562-7544 
JEFFEREY M. YUSSMAN is a member of the Tax, Business and Personal 
Planning Service Team at Wyatt Tarrant & Combs in Louisville. He concentrates 
his practice in the areas of estate planning and administration, business 
succession planning and charitable planning. Mr. Yussman also has extensive 
experience in the preparation and administration of special needs trusts for 
people with physical and mental illnesses. He received his B.S. from the 
University of Kentucky and his J.D. from the Brandeis School of Law at the 
University of Louisville. Mr. Yussman is a member of the Special Needs Alliance 
and a Fellow of the American College of Trust and Estate Counsel. He also 
serves on the Board of Directors of Community Foundation of Louisville and 
Wellspring (Schizophrenia Foundation, KY, Inc.). Mr. Yussman is included in 
Woodward White's Best Lawyers in America in Estate Planning and Elder Law 
and Kentucky Super Lawyers. 

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SPECIAL NEEDS TRUSTS: 
WHEN AND HOW TO USE THEM 

Jefferey M. Yussman 

SPECIAL NEEDS TRUSTS PROTECT ASSETS FOR SPECIAL PEOPLE 

I. 
MORAL OF THIS PRESENTATION 
If you are preparing an estate plan for a client with a loved-one who has 
special needs, you need to consider drafting a third party special needs 
trust into the estate plan to benefit that person. If you are dealing with a 
special needs client or beneficiary who is scheduled to receive an 
unplanned (or defective) inheritance or settlement from a lawsuit, and that 
person is otherwise eligible (or may become eligible) to receive public 
assistance benefits, you need to seriously consider having those 
payments paid into a first party special needs trust. 

So, 

II. 
WHAT IS A SPECIAL NEEDS TRUST (SOMETIMES ALSO CALLED 
SUPPLEMENTAL NEEDS TRUST)? 
A. 
A special needs trust (�SNT�) is a trust used primarily to preserve 
public assistance benefits for the beneficiary of the trust. 
1. 
Assets in the trust are not counted as �resources� of the 
�disabled� beneficiary which would render him/her ineligible 
for public assistance benefits; 
2. 
Trustee makes distributions in such a way as not to affect 
the disabled beneficiary�s eligibility for public benefits; and 
3. 
Assets from the SNT are then available to supplement the 
care and/or services that are not provided by public 
assistance programs. 
Examples of public assistance benefits to be protected are SSI, 
SSA, Medicaid, HUD/Section 8 housing allowances, and a plethora 
of state (and sometimes local) assistance programs. 

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B. 
Kinds of Special Needs Trusts 
1. 
Third Party Special Needs Trusts (usually created by 
relatives� estate plans): 
a. 
Common law special needs trust; 
b. 
Sole benefit trust; 
c. 
Wholly discretionary trust; or 
d. 
A specific State sanctioned trust. 
2. 
First Party (sometimes called self-settled) Special Needs 
Trusts. 
a. 
(d)(4)(A) Medicaid Payback Trust. 
b. 
(d)(4)(B) �Miller Trust.� 
c. 
(d)(4)(C) Pooled Trust. 
These trusts (which are reviewed in more detail below) all 
share the following characteristics: 

d. 
Trust assets are not counted as available resources 
for public assistance qualification (really disqualification) 
purposes; 
e. 
Transfers to these trusts are not subject to transfer 
penalties; and 
f. 
Interest or dividend income generated by the investments 
of these trusts are not counted as income for 
purposes of public benefit eligibility � with limited 
exceptions. 
C. 
How is �disabled� defined for determining whether someone is 
eligible for public assistance? 
1. 
A person is disabled if he/she is unable to engage in any 
substantial gainful activity by reason of any medically 
determinable physical or mental impairment which can be 
expected to last for a continuous period of not less than 
twelve months or end in death. A person is not necessarily 
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disabled for SSI or Medicaid purposes if a guardian has 
been appointed, but that can be a significant factor. 

2. 
Types of people who are disabled, according to 42 U.S.C. 
�1382c: 
a. 
Elderly people who have become infirm; 
b. 
Nursing home residents; 
c. 
ALF residents; 
d. 
Minor children with disabilities; 
e. 
People with disabilities living in the community; 
f. 
Disabled recipients of, or applicants to, government 
assistance programs, such as Medicaid or SSI; 
g. 
Recipients of personal injury settlements or judgments 
who need to apply for, or protect their 
continuing eligibility for, public assistance benefits. 
3. 
Determinants of disability: 
a. 
Diagnosis? 
b. 
Life expectancy? 
c. 
Has person been declared �disabled� by State�s 
appropriate court? 
d. 
Is disability permanent? 
e. 
If the person is not disabled, is he/she likely to 
become so? 
f. 
Is the person receiving public benefits at present? If 
so: 
i. 
Is the person receiving SSI (usually results in 
automatic Medicaid eligibility)? These are 
�means-tested� public benefits, meaning person 
cannot have too much income or 
resources (discussed below). 
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ii. 
SSA/SSDI (results in Midicare eligibility). No 
asset or unearned income restrictions. 
Always request written verification of the person�s 
benefits. Often they don�t really understand which 
benefits they are receiving. 

D. 
What is the source of funds for the special needs trust? 
1. Parents� (or others�) money (this is �third party� money)? 
A trust that is properly planned by another prior to death or 
gift. 

2. Disabled beneficiary�s money (this is �first party� money)? 
a. 
Lawsuit/settlement benefiting a disabled beneficiary; 
b. 
Unplanned inheritance benefiting a disabled beneficiary; 
c. 
Defective trust that would result in disqualification of 
benefits. 
E. 
Are the assets of the special needs trust a countable resource 
which will disqualify the person from receiving public benefits 
(usually Medicaid or SSI)? 
Federal Law governs: OBRA �93 -- 42 U.S.C �1396p(d) 

1. 
Revocable trust assets are a countable resource (i.e. to the 
parent) until the parent dies. If parent has a revocable living 
trust (say to avoid probate, to do tax planning, or both) which 
becomes a special needs trust for the child at parent�s death, 
the SNT assets are NOT a countable resource. 
If properly structured, this would be a third party SNT that 
would NOT require a repayment to the State upon the 
disabled child�s death (see 2, next). 

2. 
A third party special needs trust is one created by someone 
else (like a parent or other relative or friend) for the benefit of 
the special needs person. Can be created before the donor�s 
death (watch out for potential gift tax consequences) or at 
the donor�s death (which is more typical). 
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a. 
Can be created by a Will (�testamentary�) or during 
lifetime (�inter vivos�); 
b. 
May benefit others besides the disabled beneficiary 
(sometimes called a �discretionary� or �pot� trust) 
This may not be advisable in about half the states in 
the U.S. (e.g. Ohio), so check with counsel in the 
state where the beneficiary will receive public 
assistance benefits; 
c. 
At the disabled beneficiary�s death it pays to the 
beneficiaries (�remaindermen� or �remainder beneficiaries�) 
the grantor selects. The State is NOT 
required to be repaid anything; 
d. 
The trust is governed by state law. 
3. 
The �(d)(4)(a)� (referring to 42 U.S.C. �1396p(d)(4)(a)) 
�payback� (or �first party� or �self-settled�) special needs 
trust: 
a. 
Created with the beneficiary�s own resources -- either 
from a lawsuit settlement or judgment, or from an 
inheritance where a third party SNT was not created; 
b. 
The disabled person must be sixty-five or under 
when created and the trust is funded; 
c. 
Must be established at the request of the parent, 
grandparent, guardian (sometimes called a 
conservator) or a court; 
d. 
Can only benefit the disabled person during the 
beneficiary�s lifetime; 
e. 
State must be repaid ALL medical assistance (i.e. 
Medicaid) benefits that were paid on behalf of the 
disabled beneficiary upon his/her death, TO THE 
EXTENT assets are then left in the SNT. 
Supplemental Security Income (SSI) payments are 
not required to be repaid. 
f. 
Prohibited payments at disabled person�s death, 
before payback to State: 
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i. 
Debts owed to third parties; 
ii. 
Funeral expenses -- unless they had been 
prepaid; 
iii. 
Administration expenses and taxes, except 
reasonable fees for administration of the trust 
estate such as an accounting of the trust to a 
court, completion and filing of documents, or 
other required actions associated with the 
termination and wrapping up of the trust, and 
taxes due from the trust to the state(s) or 
federal government arising because of the 
beneficiary�s death (POMS Section SI 
01120.203(3)(a)); and 
iv. 
Payments to residual beneficiaries. 
i.e. the State gets paid-back first! 
4. 
The �(d)(4)(b) (referring to 42 U.S.C. �1396p(d)(4)(b)) �Miller 
Trust� (also sometimes referred to as a Qualified Income 
Trust, or �QIT�). These trusts serve a very limited purpose � 
basically to solve income problems related to long term 
nursing home benefits for primarily the elderly.1 
1 The Deficit Reduction Act of 2005 (�DRA�) had a significant effect on Medicaid planning � 
particularly for the elderly: 

1. The look back period for all transfers below fair market value is now sixty months for 
irrevocable trusts. Penalties now begin at the date of application for government assistance 
for individuals who transfer assets at less than fair market value; 
2. There is no longer a rounding down for monthly gifting, and all transfers are grouped 
together. Transfers and gifting are not considered to be �for the sole benefit� and are, 
therefore, disallowed; 
3. Annuities may no longer include balloon payments, and, in most cases, the State must be 
named as the contingent beneficiary at the death of the beneficiary to the extent necessary to 
pay back government liens; 
4. Personal service contracts are limited and narrowly defined in some states, but can be 
used with SNTs as well as pooled ((C)) trusts; 
5. Home equity over $500,000-$750,000 (for married couples where there is a �community 
spouse� living in the home) is now a countable asset; and 
6. Purchase of a life estate is permissible, but only if the beneficiary is living at that home 
and not in an assisted living facility or nursing home. 
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a. 
The trust can only receive and hold income; 
b. 
Except for a small personal needs allowance ($35.00 
per month), all income received each month must be 
spent for the beneficiary�s care; 
c. 
Any funds remaining in a Miller Trust at the beneficiary�s 
death must be used to reimburse the State for 
all medical benefits provided during the beneficiary�s 
lifetime (just like the (d)(4)(a) trust). 
5. 
The �(d)(4)(c)� (referring to 42 U.S.C. �1396p(d)(4)(c)) 
Pooled Account or Pooled (or Master) Trust. 
a. 
Established and managed by a non-profit association 
(like the ARC in many states). (In Kentucky, The 
Kentucky Pooled Trust (into which the Cedar Lake 
Foundation pooled trust, the only other pooled trust in 
Kentucky) has been merged); 
b. 
Funded by the disabled person or someone on his/her 
behalf (with the disabled person�s inherited funds or 
funds received in a legal action); 
c. 
State must be repaid ALL medical assistance (i.e. 
Medicaid) benefits that were paid on behalf of the 
disabled beneficiary from beneficiary�s account upon 
his/her death, TO THE EXTENT assets are then left 
in his/her account (i.e. of the pooled trust); or, the 
money may stay in the pooled trust (which is a 
nonprofit entity) to benefit other nonprofit organizations 
that serve special needs people. 
d. 
Many disabled people can contribute to the fund, so 
benefits those with small to midsize estates or small 
families (e.g. where no family member is available to 
administer a SNT or funds are too small to justify trust 
company (bank) management) just for the individual; 
and there is 
e. 
No age limit on participation. 
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F. 
What is the interplay between a special needs trust and the receipt 
of (or disqualification from) public assistance benefits? 
1. 
Improper administration of even a well prepared SNT can 
reduce, limit or terminate a disabled beneficiary�s public 
benefits. Seek advice of competent counsel. Also consider 
purchasing a copy of Jackins, Barbara, et. al, Special Needs 
Trust Administration Manual (a Guide for Trustees), 
iUniverse (2005). 
2. 
Trustee must understand SSI and Medical Assistance (i.e. 
Medicaid) rules. Again, seek advice of competent counsel or 
consider purchasing a copy of Elias, Stephen, Special 
Needs Trusts (Protect Your Child�s Financial Future), Nolo 
(2005). 
3. 
Some of the payment rules and options are discussed next. 
III. 
HOW CAN TRUST FUNDS BE (OR NOT BE) USED?2 
A. 
Overview 
1. 
Monthly SSI payments can be reduced if the trustee gives 
the beneficiary cash or pays for the beneficiary�s food or 
shelter (�ISM�). 
2. 
SSI Benefits can be lost for any month in which the 
beneficiary receives too much cash or owns too much in the 
way of �countable� assets. A beneficiary who no longer 
qualifies for SSI will automatically lose eligibility for Medicaid 
(until SSI is restored). 
B. 
Resource Limits for SSI Qualification 
1. 
More than $2,000 ($3,000 for a married couple) of 
�countable� resources. 
a. Examples of countable resources: 
i. 
Bank accounts; 
ii. 
Stocks and bonds; 
iii. 
Real estate -- other than a home. 
2 Derived largely from information found in Chapter 3 of Elias, supra. 

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b. 
Examples of noncountable resources: 
i. 
The disabled beneficiary�s home (including 
land); 
ii. 
Necessary car or van; 
iii. 
Furnishings and personal effects; 
iv. 
Burial and life insurance with a face value up to 
$1,500. 
2. 
Income limits: If countable income in any month exceeds 
the SSI benefit, SSI (and thus Medicaid qualification) can be 
lost for that month. These calculations can be very confusing, 
but are extremely important. To see how this might 
work, go to: 
www.socialsecurity.gov/notices/supplemental-securityincome/
text-income-ussi.htm. 

a. 
Earned income: If beneficiary earns more than 
$65.00 p/month, SSI will be reduced by the equation 
(see website). 
b. 
Unearned income (cash or assets that can be easily 
converted to cash) from gifts, donations, prizes, 
interest from bank accounts, dividends, etc. E.g. 
Money given by trustee of SNT to beneficiary is 
unearned income in the month received. (Any of it left 
in a subsequent month would be part of the countable 
resources.) 
i. 
First $20.00 of unearned income has no effect 
of SSI; 
ii. 
Amounts over that reduce the SSI grant dollarfor-
dollar. 
c. 
In-kind income is food or shelter (including payments 
for rent or mortgage, utilities, etc.) (in-kind gifts of 
other items are not in-kind income). In-kind income 
reduces the SSI grant up to the lesser of: 
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i. 
the value of the gift, or 
ii. 
1/3 of the maximum federal portion of the 
SSI grant less $20. For 2010 that amount is 
$674. (The max. federal SSI grant increases 
each year, with the cost of living. To compute 
max. reduction in any year, take 1/3 of the 
maximum allowable payment, deduct $20 from 
it, and that is the max. reduction in any month; 
so the net monthly benefit will still be $449.44. 
(See, e.g. www.ssa.gov. In 2010 the maximum 
reduction is $224.66 per month.) There is a 
state supplement available to the federal SSI 
grant in some states, but not Kentucky. 
Key planning matter for Trustee of SNT: 

Trustee may choose to provide in-kind income 
to beneficiary (in order to increase lifestyle, 
standard of living, etc.) while only reducing the 
SSI grant by the monthly amount. May be a 
good trade-off, as determined by Trustee, in its 
discretion. Be careful, however, if reduction 
wipes out all SSI, automatic Medicaid may 
also be lost and beneficiary may have to 
apply for a special waiver. Contrarily, in 
most states, if disabled beneficiary receives 
at least $1 of SSI, she/he automatically 
qualifies for Medicaid. 

d. 
Elias, supra, lists the following items as examples of 
things that can be paid for by the trustee of the SNT: 
i. 
Out-of pocket medical and dental expenses; 
ii. 
Home improvements; 
iii. 
Medical equipment not provided by Medicaid; 
iv. 
Computers, etc; 
v. 
Eyeglasses; 
vi. 
Cable TV; 
vii. 
Exercise equipment; 
viii. 
Telephones, TVs, radios; 
ix. 
Annual independent checkups; 
x. 
Cameras; 
xi. 
Transportation; 
xii. 
Trips and vacations; 
xiii. 
Motor vehicles; 
xiv. 
Visits to friends; 
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xv. 
Vehicle maintenance; 
xvi. 
Entertainment; 
xvii. 
Vehicle insurance premiums; 
xviii. 
Life insurance premiums; 
xix. 
Newspaper & magazines; 
xx. 
Physical rehab services; 
xxi. 
Athletic training & comp; 
xxii. 
Essential dietary needs; 
xxiii. 
Personal care attendants; 
xxiv. 
Materials for hobbies; 
xxv. 
Voc. rehab. or hab; 
xxvi. 
Tickets for rec. & cultural events; 
xxvii. Professional services; 
xxviii. Musical instruments; 
xxix. 
Tuition & related exps; 
xxx. 
Costs related to attending meetings; 
xxxi. 
Cosmetics; 
xxxii. 
Memberships in book, health, etc. clubs; 
xxxiii. Conferences & seminars. 
Elias, p. 34. 

Key is for trustee to make payments directly to 
providers and not to the beneficiary or in reimbursement 
to the beneficiary. 

IV. 
WHO MAY SERVE AS TRUSTEE OF A SPECIAL NEEDS TRUST? 
A. An individual other than the beneficiary, age eighteen or older. 
1. 
Advantages of using an individual Trustee: 
a. 
A feeling of more individual (family or friends) control 
over trust�s assets and administration; 
b. 
A feeling of controlling costs and expenses. 
2. 
Disadvantages: 
a. 
Demands a great deal of time and attention; 
b. 
Requires acute accounting and the preparation of 
income tax returns (which can be delegated); 
c. 
Managing a trust requires fiduciary knowledge, skill 
and diligence. Any individual undertaking this respon11 



sibility must not only have the willingness to serve, but 
undertake the necessary education to serve as a 
fiduciary; 

d. 
Public assistance rules are excruciatingly complex, 
and constantly changing. It is nearly impossible for 
anyone not working continuously in the area to 
become and remain well-versed in the intricacies of 
the law, and to be able to navigate the administrative 
maze that is often involved; and 
e. 
Increased risk of loss to the trust/beneficiary (without 
ability for adequate indemnification). 
B. 
A professional (corporate) Trustee 
1. 
Advantages: 
a. 
It is what they do. They are able to skillfully handle all 
of the areas that are disadvantages for the individual 
trustee. 
b. 
They have experience which can help provide 
additional resources for helping the SNT beneficiary 
enhance or increase the level of care and services 
they receive. 
c. 
They can reduce the potential liability in the decision-
making process related to the settlement allocation 
(such as helping with Medicare/Medicaid lien resolution 
and set-asides discussed in much more detail 
elsewhere in this seminar). 
d. 
They are bonded (should be confirmed by the 
planner). 
2. 
Disadvantages: 
a. 
There is a cost associated with this professional 
service; and 
b. 
There may be a perceived loss of input by family 
and/or friends (which can be addressed through 
advisory and other roles). 
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V. CONCLUSION 
SSI and Medicaid (in particular Medicaid, because of the cost of 
health care) processes are a real hassle, but well worth it. Creating a 
special needs trust is the federally mandated way to protect those benefits 
and to maintain the disabled beneficiary�s assets for other needs and 
lifestyle enhancements. 

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