Special Needs Trusts In Colorado
What Is A Special Needs Trust?
A special needs trust (also known as a supplemental care trust or supplemental needs trust) is a discretionary trust designed to provide for a disabled individual’s supplemental care (i.e., those things that are not provided under public benefit programs) while maintaining their eligibility for public benefits.
Its primary purpose is to preserve inheritances, personal injury settlements and awards, and other assets for use by an individual with special needs without disqualifying them from eligibility for public benefits.
Who Should Consider A Special Needs Trust?
Special needs trusts are very appropriate for parents of adults or minor children with disabilities who wish to leave their children more than $2,000 in countable assets. These parents are concerned about who will care for their child and how that child will be provided for once their parents pass away. If a parent leaves all their assets directly to the disabled child, that child will not be financially eligible for public benefits until the inheritance is spent down. Once spent down, public benefit programs may then provide for the basic needs of the child with a disability. There will not, however, be any funds available to supplement the child’s basic needs.
In essence, a special needs trust allows the disabled individual to keep both the inheritance as well as the public benefits. A special needs trust is a mechanism that provides for those extras that can make the difference between subsisting and thriving.
How Does A Special Needs Trust Preserve Eligibility For Public Benefits?
A trust is a separate legal entity. Funds are transferred into the trust to a person, called the trustee, who is responsible for managing, investing and distributing the assets or property of the trust. The trustee holds the funds for the benefit of the beneficiary of the trust. The person who establishes the trust and who initially transfers the property or causes the property to be transferred to the trust is called the grantor or settlor. This is often the parent.
In order to understand how the special needs trust can shelter inheritances and personal injury funds, it is necessary to understand the concept of availability. Availability is the standard used by governmental agencies to determine whether assets (including trust funds) will be counted for purposes of determining asset or resource eligibility for public benefits. As indicated above, an individual cannot have more than $2,000 in nonexempt assets to qualify for Supplemental Security Income (SSI) and most Medicaid programs. In general, if an applicant or recipient can gain access to an asset or resource, it will be deemed available to that individual for purposes of resource eligibility and, therefore, will be countable against the $2,000 maximum. If, however, access to such funds is restricted so that only the trustee, a court or a third person (and not the disabled child beneficiary) has authority to make distributions from the trust, then such funds are deemed legally unavailable to the beneficiary and are not counted for public benefit eligibility purposes. Simply put, special needs trusts are drafted so as to make the trust funds unavailable for purposes of Medicaid eligibility.
What Types Of Distributions May Be Made From Special Needs Trusts?
Special needs trusts are designed to supplement – rather than to supplant or replace – goods and services already provided under a public benefit program such as Medicaid. A properly drafted special needs trust should therefore make it clear that:
Trust funds are not legally available to the beneficiary in the sense that the individual cannot compel or require a distribution.
Trust funds should not be used for food or shelter-related items or for services already provided by a public or private benefit program. For third party-funded trusts (see discussion below), there may be more flexibility.
Examples of acceptable special or supplemental needs that can be paid for by the trustee of the special needs trust include but are not limited to the following:
Support services, dental care, physical therapy, massage and other medical costs to the extent not covered by some other public benefit program
Payments for tuition, books and supplies
Transportation to and from school
Health and life insurance premiums
Books, magazines and video games
Season tickets for plays, museums and sporting events
Televisions, VCRs, CDs, sound systems and computers
Hobbies
Vacations
Costs for travel companions
Automobiles
Automobile maintenance expenses, car insurance and gasoline
Cleaning supplies and paper products
Bus passes
Telephone, cable television and internet
A prepaid burial/cremation and funeral plan: If it’s $1,500 or less, it can be revocable; if it’s more than $1,500, it should be irrevocable
Cost differentials between private and semi-private rooms in institutional settings
Clothing
Examples of distributions from a special needs trust that can adversely affect public benefits include the following:
Payment of rent, mortgage or real property taxes
Heating and cooling bills
Electricity, water, sewage and garbage collection
Payments for groceries or meals
Cash distributions directly to the beneficiary (with the exception of the $20 unearned income disregard under the SSI program).
Such items should usually be purchased by the beneficiary using their SSI payments or other public benefits such as food stamps.
Trustees of special needs trusts should be granted full discretion, meaning that they have the absolute right to decide whether to distribute funds. If the trustee is required to distribute income or principal rather than being granted the choice to do so, the amounts subject to mandatory distribution will be deemed countable regardless of whether they were actually distributed.
Types Of Supplemental Care Trusts
A third party-funded special needs trust is a trust that contains assets belonging to someone other than the beneficiary, such as a parent or other relative. This type of trust is typically established under the last will and testament of the parent.
The will provides that upon the parent’s death, any assets that are to go to the disabled child are to be held in a special needs trust, the terms of which are contained either within the will or in a separate trust document that is cross-referenced in the will. Third party-funded special needs trusts can be very flexible and, unlike the self-settled disability trusts (discussed below), they can contain provisions allowing funds remaining in the disabled child’s trust to pass to the parent’s other children or grandchildren upon the disabled child’s death. This is in contrast to the disability trust, which must provide that remaining funds first be used to repay Medicaid expenses incurred by the state.
A self-settled special needs trust is a trust that contains assets that the disabled child already owns or is legally entitled to. These assets include the disabled individuals’ own savings, personal injury settlement and, more commonly, inheritances that the disabled child is entitled to receive outright – for example, when the parent fails to set up a third party-funded special needs trust in their will and the inheritance goes directly to the disabled child.
In order to shelter assets that already belong to the disabled child or to which they are already legally entitled, there are only two types of trusts that can be used to maintain Medicaid eligibility: a disability trust, and a pooled trust, both of which are described in more detail below.
In order to be a qualified disability trust:
The beneficiary must be disabled as that term is defined by Social Security law.
The beneficiary must be under age 65.
The state must be designated as the remainderman, thereby entitling it to any funds remaining in the trust at the beneficiary’s death.
The trust must be established by the beneficiary, a parent, grandparent, legal guardian or court;
The trust must be reviewed and approved by the Colorado Department of Health Care Policy and Financing (unless already approved by the federal Social Security Administration).
The trust must be drafted as a special needs trust (i.e., funds must be legally unavailable to the beneficiary).
The second type of permissible self-settled trust is a pooled trust. This form of trust is very similar to the disability trust except that it is run by a nonprofit agency. In order to be a qualified pooled trust, the following requirements must be met:
The beneficiary must be disabled as defined under the Social Security Act and, unless waived by the state, under the age of 65.
The trust must maintain a separate subaccount for each beneficiary.
The trust must be established and managed by a nonprofit association (e.g., Colorado Fund for People With Disabilities).
The trust must be established by a parent, a grandparent, the court, a guardian or the individual.
The state must be designated as the remainderman except to the extent that the pooled trust retains the funds (the trust will almost invariably retain.
The trust must be reviewed and approved by the Colorado Department of Health Care Policy and Financing.
The trust must be drafted as a special needs trust (i.e., funds must be legally unavailable to the beneficiary).
When Should You Set Up A Special Needs Trust?
If you are contemplating leaving anything to your loved one with special needs, then you need to set it up now. As discussed above, if you fail to do so, then the only choices left to your disabled child is to immediately spend down the inheritance or place it in a disability trust or pooled trust, which are less flexible and contain provisions that require any funds remaining in the trust at death to either be paid to the state or remain with the pooled trust, instead of passing it on to other heirs.
