Roseville Estate Planning Attorney Explains How SSA Disrupts First-Party Special Needs Trusts

Law Firm Newswire



Roseville, CA (Law Firm Newswire) February 11, 2016 – Special needs trusts (SNTs) are established for beneficiaries who are physically or mentally disabled.

They are drafted in such a way that the beneficiary can reap the benefits of property that is held in trust for them while simultaneously maintaining eligibility to receive needs-based government benefits. The three kinds of SNTs are first-party, third-party and pooled trusts.

First-party SNTs are used to hold property owned by the person with special needs, and are established by the disabled person’s parent, grandparent, conservator or the court. These trusts apply in cases in which the disabled individual has accumulated several assets, inherited assets or was the recipient of a personal injury award. The person could also have received assets through a divorce settlement, retirement plan or life insurance policy. The trustee of the trust can use the assets for the exclusive benefit of the beneficiary to supplement, but not supersede, any needs-based government benefits for which the disabled individual may be eligible.

“First-party SNTs are a vehicle through which disabled individuals can improve their quality of life while maintaining their eligibility for needs-based government benefits,” said prominent Roseville, California, estate planning attorney David Wade.

The Social Security Administration (SSA) has recently become more aggressive in challenging the legality of first-party SNTs, and as a result, the agency’s actions may adversely affect the beneficiary’s eligibility to receive Supplemental Security Insurance (SSI) and Medi-Cal benefits. Under federal law, upon termination of the trust, the remaining assets must initially be used to reimburse the SSA and the California Department of Health Care Services (DHCS) for the amount of funds the beneficiary received in SSI and Medi-Cal benefits.

Several first-party SNTs drafted in California contain the provision of payback of California Medi-Cal claims only. Due to changes implemented by the SSA, all first-party SNTs are now required to stipulate that all states that provided SSI or Medi-Cal be reimbursed. This provision is no longer restricted to California, even if the beneficiary never moves from California.

In addition, in the case of Draper vs. Colvin (D SD, July 10, 2013, No. 12-4091-KES), the Eighth Federal Circuit Court ruled that the parents of a disabled girl were disallowed from establishing trusts for her because they were also her agents pursuant to a broad power of attorney, and thus, did not act as her parents when they signed the first-party SNT.

Because of this distinction, the first-party SNT was rendered null and void. The parents then secured a court order from a South Dakota district court to amend and approve the amended trust in an effort to designate the amended trust as one that was established via court order. However, their attempt was unsuccessful. The Eighth Circuit held that the order only amended the trust, and did not establish the trust.

Furthermore, the SSA has restricted application of the “sole benefit rule,” which mandates that the trustee only use the trust assets for the exclusive benefit of the disabled individual. The trustee is no longer permitted to expend funds to pay travel expenses of family members and friends to visit the beneficiary. The trustee also cannot pay the beneficiary’s relatives to act as the beneficiary’s care providers unless they possess medical certifications, training or approval to provide such care. If a trust fails to conform to these requirements, it will be disqualified.

Special needs advocates are conferring with the SSA to discuss the recent changes concerning first-party SNTs. One positive outcome is that the SSA will not review any trusts that have already been approved unless there is a triggering event, an example of which is a trust amendment. In light of the constraints placed on first-party SNTs, families are encouraged to create third-party SNTs, which are usually established by parents, grandparents or other relatives who provide funds for the trust via their will, or by buying life insurance payable to the trust.

It is important to remember that in a third-party SNT, the funds cannot be expended for housing or food, both of which are considered to be basic needs under Social Security laws. If the beneficiary is receiving housing or food from another person or the SNT, the public benefits will be reduced or will cease. In contrast to the first-party SNT, the third-party SNT does not have a requirement of payback to the government for Medi-Cal benefits.

Learn more at Wade Law Offices 2400 Professional Drive Suite 100 Roseville, CA 95661 Phone: (800) 835-2634 Wade Law Offices Blog
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