NJ Special Needs Trusts FAQ's

1.  Can a Special Needs Trust buy a house?

Yes.  A Special Needs Trust can buy a house and there are often good reasons to do so.  However, there are some strict rules under SSI law and under New Jersey Medicaid regulations that must be considered before making that decision.

2.  Can a Special Needs Trust buy an automobile or van?

Yes.  A Special Needs Trust can buy an automobile or a van but insurance is often difficult to arrange.  It is usually better for the trust to lease the motor vehicle.

3.  Can a Trust pay for vacations?

Yes.  A Special Needs Trust can pay for vacations.

4.  Can a Special Needs Trust pay parents for the care of a child?

In New Jersey it is very difficult for a Special Needs Trust to pay parents for the care of a child under age 18.  This is because the assets of a Special Needs Trust under New Jersey Medicaid regulations cannot be used to discharge a parental obligation of support.

5.  Who gets the assets left in the Special Needs Trust on the death of the beneficiary?

Under Federal law, the State Medicaid Agency must be paid back for any benefits paid to the beneficiary of the Special Needs Trust.  If there are assets remaining after repayment to Medicaid, they go to those beneficiaries named in the trust document.

6.  Does a person on SSD need a Special Needs Trust?

SSD carries with it Medicare.  Neither SSD nor Medicare is means tested. However, there are often other reasons why a person on SSD might need a Special Needs Trust.  For example, if there is a chance that person may eventually reside in group home paid for by Medicaid, a Special Needs Trust should be considered.

7.  Can a Special Needs Trust distribute cash to the beneficiary?

Any cash distributed by a Special Needs Trust to a beneficiary will reduce the SSI payment dollar for dollar.  If the SSI payment is completely eliminated, Medicaid will be lost.  It is not good practice for a trustee of a Special Needs Trust to distribute cash.

8.  How are d(4)a Trusts taxed?

There are income, gift and estate tax considerations in establishing and administering a Special Needs Trust.  These must all be carefully considered.

9.  Who is a good choice for trustee?

It is best not to have a family member as a sole trustee of a Special Needs Trust.  The combination of a family member and a professional trustee is often a good arrangement.

10.  Who is a good choice for a trust protector?

If the personal injury attorney who represented the family is willing to serve as trust protector, this is often a good choice because the family has confidence in that person.

11.  How can I protect a special needs trust from those who prey on vulnerable beneficiaries?

An inheritance from parents who fund their child's special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. When you plan with trusts, you decide who has access to the information about your children's inheritance. This protects your child and other family members, who may be serving as trustees, from predators.

12.  Can others contribute to my child's special needs trust?

One key benefit of creating a trust now is that your extended family and friends can make gifts to the trust or include the trust in their estate planning. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low. In these cases, the special needs trust should be irrevocable rather than revocable.

13.  Why is it important to have an attorney who specializes in special needs trusts?

It is important that special needs trusts not be unnecessarily inflexible and generic. Although an attorney with some knowledge of trusts can protect almost any trust from invalidating the child's public benefits, an attorney without special needs experience may not customize the trust to the particular child's needs, and the child may not receive the benefits that the parent provided when they were alive.

Another mistake attorneys without special needs experience make time and time again is putting a "pay-back" provision into the trust rather than allowing the remainder of the trust to go to others' upon the special needs child's death. While these "pay-back" provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your family hundreds of thousand of dollars, or more.

14.  Why not just disinherit a child with special needs?

Many disabled people rely on SSI, Medicaid (Medi-Cal in California) or other government benefits to provide food and shelter. You may have been advised to disinherit your child with special needs - the child who needs your help most -- to protect that child's public benefits. But these benefits rarely provide more than subsistence. And this "solution" does not allow you to help your child after you are incapacitated or gone.

When your child requires or is likely to require governmental assistance to meet their basic needs, you should consider establishing a special needs trust.

15.  How do I choose a trustee?

Choosing a trustee is one of the most important and difficult issues in special needs trusts. The trustee must have the necessary expertise to manage the trust, including making proper investments, paying bills, keeping accounts, and preparing tax returns. A professional trustee will have these skills, but may be unfamiliar with the beneficiary and his unique needs. For those who may be uncomfortable with the idea of an outsider managing a loved one’s affairs, it is possible to simultaneously appoint both a professional trustee and a family member as co-trustees. It's also possible to hire a trust "protector," who has the power to review accounts and to hire and fire trustees, and a trust "advisor," who instructs the trustee on the beneficiary’s needs. However, if the trust fund is small, a professional trustee may not be interested. Make sure that whomever you choose is financially savvy, well-organized, and, most important, ethical.

16.  Can I create a special needs trust and still be eligible for Medicaid and SSI?

Each public benefits program has restrictions that the special needs trust must comply with in order not to jeopardize the beneficiary’s continued eligibility for public benefits. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two "safe harbors" permitting the creation of special needs trusts with a beneficiary's own money if the trust meets certain requirements.

The first of these is called a "payback" or "(d)(4)(A)" trust, referring to the authorizing statute. "Payback" trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary's death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary's behalf.

Medicaid and SSI law also permits "(d)(4)(C)" or "pooled trusts." Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual special needs trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary his- or herself. In addition, at the beneficiary's death the state does not have to be repaid for its Medicaid expenses on his or her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. (At least, that’s what the federal law says; some states require reimbursement under all circumstances.) Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.

17.  What is a special (supplemental) needs trust?

Special needs trusts (also known as "supplemental needs" trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining eligibility for public benefits.

As their name implies, special needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing, and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.) Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (such as specially equipped vans), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses.

Often, special needs trusts are created by a parent or other family member for a child with special needs (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These "self-settled" trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.

18.  How can I fund a special needs trust?

A parent with a child with special needs should consider buying life insurance to help fund the special needs trust set up for the child’s support. What may look like a substantial sum to leave in trust today may run out after several years of paying for care that the parent had previously provided. The more resources available, the better the support that can be provided the child. And if both parents are alive, the cost of "second-to-die" insurance -- payable only when the second of the two parents passes away -- can be surprisingly low.

19.  Will trust income affect SSI eligibility?

Income paid from a special needs trust to a beneficiary will reduce SSI benefits by one dollar for every dollar paid to him or her directly. In addition, payments by the trust to the beneficiary for food or housing are considered "in kind" income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such "in kind" income. Some attorneys draft the trusts to limit the trustee's discretion to make such payments. Others do not limit the trustee's discretion, but instead counsel the trustee on how the trust funds may be spent, permitting more flexibility for unforeseen events or changes in circumstances in the future. The difference has to do with philosophy, the situation of the client, and the amount of money in the trust.

20.  Can others contribute to my child's special needs trust?

One key benefit of creating a trust now is that your extended family and friends can make gifts to the trust or include the trust in their estate planning. You can also consider whether making the trust the beneficiary of a life insurance policy makes sense now, while you are healthy and insurance rates are low. In these cases, the special needs trust should be irrevocable rather than revocable.

21.  What is a special (supplemental) needs trust?

Special needs trusts (also known as "supplemental needs" trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose his or her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining eligibility for public benefits.

As their name implies, special needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing, and shelter if the trustee decides doing so is in the beneficiary’s best interest despite a possible loss or reduction in public assistance.) Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (such a specially equipped vans), training and education, insurance, transportation, and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment and appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses.

Often, special needs trusts are created by a parent or other family member for a child with special needs (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These "self-settled" trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.

22.  Why not pass the money on to another child?

Some parents choose to avoid the complication of a trust by leaving their estates to one or more of their healthy children, relying on them to use the funds for the benefit of their disabled siblings. This is not a solution that will protect your child because it creates great risks to the security of the funds transferred.

In addition, this can create a burden for the child or children holding these "morally obligated" funds. Can he or she spend them on herself and her family? If so, how much is belongs to each? This approach can also create rifts among the other siblings, as some may spend the funds for their own needs and some for their brother or sister.

Except in the case of a very small estate, the share of your estate going to your child with special needs should be placed in a trust for his benefit.

23.  How can I leave money to a child with special needs?

In almost all cases where a parent will leave funds at death to a child with special needs, this should be done in the form of a trust. Trusts set up for the care of a child with special needs generally are called "supplemental" or "special" needs trusts.

Money should not go outright to the child, both because he or she may not be able to manage it properly and because receiving the funds directly may cause the child to lose public benefits, such as Supplemental Security Income (SSI) and Medicaid. Often, these programs also serve as the entry point for receiving vital community support services. In the case of SSI, at the end of 1999 Congress enacted laws making it much more difficult to create a trust for a disabled individual after she has received an inheritance, making it even more important that the parents create the trust as part of their estate plan.

24.  What is a plan of care?

Where is your son going to live when he can no longer live with you? Will he move in with a sibling? Or into a group home? Who will make the decision? Who will monitor the care he receives? It’s never too soon to begin answering these questions and making sure that the living and support arrangements are in place.

In some cases, it can ease the transition for all concerned if the child moves to the new living arrangement while his parents can still help with the process. In many parts of the country, non-profit organizations and private consultants can help set up the plan, research available options, and assist in the move.

It will help everyone involved if the parents create a written statement of their wishes for their child’s care. They know him or her better than anyone else. They can explain what helps, what hurts, what scares their child (who, of course, is an adult), and what reassures him or her. When the parents are gone, their knowledge will go with them unless they pass it on.

This plan of care, often called a "Memorandum of Intent," should also include all the basic information anyone taking over from the parents should have, such as the name and contact information for the child's doctor and information on any medications he or she takes. This document should be updated on at least an annual basis.