SEPTEMBER 26, 2011 VOLUME 18 NUMBER 34
There is so much confusion about the difference between “self-settled” and “third-party” special needs trusts, that we want to try to explain and simplify some of the key concepts. Here are some of the most common questions (and misunderstandings):
What is the difference between “self-settled” and “third-party” special needs trusts?
This is one of the most perplexing concepts to explain to people, but it is also one of the most important. In general terms, there are two kinds of special needs trusts: “self-settled” and “third-party” trusts. Some people call the former “first-party.” Some make the distinction between “special needs” and “supplemental benefits” trusts. Some talk about “litigation” trusts. But most practitioners use the “self-settled” / “third-party” distinction, and so will we.
“Third-party” special needs trusts (the kind we’re not talking about here) are set up by one person (the third party — sorry about the illogical numbering) for the benefit of another (the first party) who is receiving benefits from the government (the second party in this scenario). Let’s make it simple: if you create a trust for your daughter (who has a developmental disability), and put your own money into the trust, that is a third-party trust. But if your daughter creates her own trust, to hold her money, that is a self-settled trust.
To make things more confusing, most self-settled trusts are not literally self-settled at all. You, for instance, might sign the trust document creating your daughter’s self-settled trust. A judge might authorize you to do so. Your daughter might not be involved at all — in fact, she could theoretically object and still be treated as if she had set up the trust. The key is this: was there a moment in time during which she had the right to receive the money in the trust outright? If so, it is probably a self-settled trust.
Most (but certainly not all) self-settled special needs trusts are set up to receive personal injury settlements or judgments arising from a lawsuit. That may be the easiest way to distinguish self-settled from third-party trusts: if the trust is the result of a personal injury or wrongful death lawsuit, it is almost certainly a self-settled trust.
The second most common circumstance in which a self-settled trust might be created is when a family member leaves money or property outright to an heir who has a disability. Because the recipient had a right to receive the money (or property) outright for at least a moment in time, that kind of trust will usually be a self-settled trust, as well — even though arising from an inheritance.
What difference does it make whether a trust is self-settled or third-party?
All the difference in the world. The former type of trust must have a “payback” provision, returning up to the full value of the trust to any state which provided Medicaid benefits upon the death of the beneficiary (or, in most states, upon the termination of the trust). Third-party trusts do not need to have a payback provision, and it is almost always a blunder to include one.
There are other differences: the self-settled trust will be scrutinized much more closely for types of expenditures (in most states — your experience may vary on this one). Third-party trusts usually fly largely under the radar of public benefits agencies. Self-settled trusts are usually supervised by a court (again, state experience may vary widely); third-party trusts almost never are court-supervised. In Arizona, any self-settled special needs trust must include very restrictive language about how it can be used; third-party trusts need not include that language. In general, if you had a disability or were a trustee you would much rather have your trust be third-party than self-settled.
Who is the “grantor” of a self-settled special needs trust?
This is a particularly fun question. There are at least three different concepts involved here, and they have different language. Everyone — including seasoned practitioners — tends to use the terms interchangeably and the result can be confusing.
Trust law recognizes that someone has to have set up a trust. In trust law that person is usually called the “settlor.” Sometimes you see “trust creator” or some similar language — but the sense is the same. The settlor is the person who said “I hereby create a trust.” Usually they say it in writing, but that is not actually required — or at least not in Arizona. But we digress.
Federal income tax law introduces a different kind of person — the “grantor.” The settlor might not be the grantor. There might be one, two or dozens of grantors for a given trust. But usually, the grantor is the person whose money was transferred into the trust. In the case of a self-settled special needs trust, that will always be the beneficiary — the person with a disability whose public benefits are being protected by establishment of the trust.
Along comes public benefits law and invents another role: the trust “establishor,” if you will. Federal law says every self-settled special needs trust must be “established” by one of the following: the beneficiary’s parent, grandparent, or guardian — or by the court. Notice anyone missing from that list? You’re right — the beneficiary isn’t on the list.
So in many self-settled special needs trusts, there are three different people with three different roles:
The grantor, who is also the beneficiary, who did not sign the trust document
The establishor, who might be a judge and might not sign the document at all, and
The settlor, who signed the trust document — perhaps at the judge’s direction.
Can there be more than one grantor in a self-settled special needs trust?
Technically, yes — but only technically. Some states (not including Arizona, happily) require that the establishor of a self-settled special needs trust put some money or property into a trust in order for it to exist. In those states a parent might sign a special needs trust, and staple a $10 bill to the trust to show that it has been legally created. That makes the parent a grantor for tax purposes — as to the $10 investment. The rest of the money comes from the beneficiary’s personal injury settlement (or inheritance, or savings), which makes the beneficiary the grantor for the bulk of the trust’s assets. So technically the parent and the beneficiary are both grantors. Sound like an absurd distinction? It is.
Does a self-settled special needs trust need a new tax identification number?
No. At least, not usually. The beneficiary’s Social Security number will suffice just fine. Some banks, brokerage houses and accountants may argue otherwise, but there is a special IRS rule for such trusts, even though the grantor/beneficiary is not the trustee. But because the trustee is not the beneficiary, it is permissible for the trust to get a separate number — it is called, incidentally, an Employers Identification Number (or EIN), even if the trust does not have any employees.
What can a self-settled special needs trust pay for?
Ah, that is a great question — and very difficult to answer. It depends on so many factors. One must look at the trust instrument itself, at state law governing self-settled special needs trusts and at the appropriate Social Security and Medicaid rules. Sometimes there are things that the trust could pay for that it should not. Sometimes there are things that the trust ought to be able to pay for, but that it can’t — even though everyone might agree that they would benefit the beneficiary. You might look at the Special Needs Alliance’s “Handbook for Trustees” for better guidance, but at some point you are just going to need to talk to an experienced and capable lawyer. The Special Needs Alliance might be able to help you there, too.
We hope that helps explain what a self-settled special needs trust is. Next week we plan on telling you about third-party trusts, and some of the rules governing them.
All you want to do is to find a lawyer to draft a simple will and powers of attorney. You ask your friends, but no one has a referral they feel unequivocally good about. A little online searching reveals that there are any number of organizations, credentials and qualifications–but how on earth do you figure out which lawyer actually knows something about estate planning, or Medicaid eligibility, or special needs trusts, guardianship and conservatorship (or whatever your elder law problem actually might be)? Let us give you a primer so you can identify the candidates.
NAELA (the National Academy of Elder Law Attorneys) is probably the first place to look. Any lawyer in the country who does any significant amount of elder law (and that term is generally understood to include all the categories in the previous paragraph) probably belongs. There are about 5000 members, and the organization has been around for twenty years.
To belong to NAELA all you have to provide is proof that you are a lawyer and a $375 check each year. Even though the dues are not high, they serve as a low-level filter–those who sign up tend to actually work in the trenches of elder law. The organization has the best continuing legal education programs, the best camaraderie and the best sharing of any professional organization around.
There are actually several “flavors” of NAELA. Advanced elder law practitioners formed a subdivision of the organization two years ago; the Council of Advanced Practitioners (NAELA/CAP) is a highly selective group who meet separately once a year, exchange more sophisticated practice ideas and share much closer personal and professional connections.
Then there are the NAELA Fellows. Each year a small handful of NAELA members are selected to be Fellows, based on their reputations in the national and local communities, their hard work in the field, and their writing and speaking. The Fellows are the best-known, hardest-working elder law attorneys in the country–and there are fewer than 100 of them.
NAELA members who want to announce their availability for particular types of elder law work can sign up for the NAELA Experience Registry. Other than a certification that you are familiar with the area you sign up for, and payment of an annual fee, there is no requirement that you prove knowledge, experience or capability. Still, participation in the Experience Registry can be an indication of real interest in an area of elder law.
NELF (the National Elder Law Foundation) was an outgrowth of NAELA but is a separate entity. Its primary function is to operate an elder law certification program, and to grant successful applicants the CELA (Certified Elder Law Attorney) designation. CELAs must pass a full-day written exam (which has a famously low pass rate) and establish that they have real experience in the field.
ACTEC (the American College of Trust and Estate Counsel) is an entirely separate organization with some overlap but a significant difference. ACTEC Fellows (the name for all members) have to have been nominated by an existing Fellow; there is no application process and no way to sign up other than to get invited after a year-long vetting process. ACTEC Fellows tend to dress nicer, drink finer wines (not nearly as much beer) and belong to larger law firms than NAELA members.
There are, in addition, several for-profit organizations focused on estate planning and other elder law sub-specialties. Membership in any one of these may indicate that the lawyer takes the practice seriously, is trying to improve his or her skills through continuing education, and is committed enough to the practice to pay a (sometimes hefty) fee. Those organizations include the National Network of Estate Planning Attorneys (NNEPA), the American Academy of Estate Planning Attorneys (AAEPA), and Wealth Counsel. Each of those organizations has its staunch partisans; even a cursory look at their websites will illustrate that their primary focus is on their membership, rather than providing public information or referrals.
There are at least two national organizations for lawyers who practice in the special needs arena. One, the Special Needs Alliance, is a non-profit organization with an invitation-only membership structure. The other, the Academy of Special Needs Planners, is a membership group open to anyone who is interested enough in the field to pay its hefty membership fee.
In addition to all of that, your state bar association and/or Supreme Court may have created a legal specialty in estate planning, tax, elder law, or related fields–or in more than one of those. State specialization usually indicates a serious peer review process, a challenging written examination, and a higher requirement for continuing legal education to maintain the certification. Arizona, for example, provides certification for “Estate and Trust” lawyers as well as Tax practitioners, and also recognizes the CELA designation described above.
Should you demand that your new lawyer have one or more of the credentials described here? No, not necessarily–though you might ask further questions if he or she does not belong to any of these professional associations. The websites of each may give you some leads to locate experienced and competent practitioners in your area.
DECEMBER 6, 2010 VOLUME 17 NUMBER 37
A client’s question:
My brother has a special needs trust, and I am the trustee. He lives in his condo and gets services from AHCCCS and ALTCS. Can the trust pay his property taxes?
Interesting question. The answer isn’t as easy or straightforward as it ought to be. Let’s start with the simple (but not completely accurate) answer, and then explain some of the limitations and qualifications.
Unless the trust language prohibits payment of property taxes (and sometimes the trust does prohibit such payments), they can be paid from the trust. There may be consequences he will have to deal with, and there may be some circumstances in which it is not permitted, but generally it can be done.
There are a number of questions that will affect the answer:
Is the trust a “self-settled” or “third-party” trust? In other words, was it set up to handle your brother’s money (perhaps from a personal injury settlement, for instance) or was it created by a family member and funded with their own money? If the former, the rules will probably be somewhat stricter. If the latter, there will be no problem with paying the taxes (again assuming the trust language permits it), though there may be some reduction in public benefits (especially Supplemental Security Income).
Does the trust own the condo? If not, does it belong to your brother, or to some other family member? It may be a little easier to pay the taxes if the trust owns the property. The most difficult problems will arise if title is in a third person’s name, with your brother not owning any interest.
Do other people live with him? If so (at least in Arizona) it may be a little more complicated, though it may not. In some situations the trust may only be able to pay a proportional share of the property taxes. In other words, if he has a roommate it might only be possible to pay half the property tax bill.
Is he on AHCCCS or ALTCS? If the former, the rules are likely to be a little bit easier. If the latter, the payments might be treated more strictly. (If your brother does not live in Arizona, this distinction will not make any sense — AHCCCS and ALTCS are the Arizona programs for Medicaid and the long-term care component of Medicaid, respectively. Other states not only do not use the same acronyms, they also do not necessarily make the same distinctions between programs). If your brother is on ALTCS but receiving most of his services from the mental health or developmental disabilities program, the ultimate answer may be different yet again.
Is he receiving Supplemental Security Income (SSI) payments? If so it is probably going to be much easier to pay the property taxes.
You can see that the question is getting more complex as we go along. It is an unfortunate reality of the public benefits arena — the rules are complicated and often draconian.
Let’s assume that we can get past the threshold question, and can determine that it is permissible to pay the property taxes on your brother’s condo. That immediately raises a couple of related questions:
What is the best way to do it? Two payments each year, or one payment? Most people pay their Arizona property taxes in two equal installments. One is due in October and the other in April. There is an alternative, however, and it is usually attractive for special needs trusts: you can make both halves of the tax payment at once, without interest, provided that you do so by December 31. In other words, no payment in October, a full payment in December, and then no payment in April. Why do it this way? Because paying the taxes might reduce your brother’s SSI payment for each month in which a payment is made — so it makes sense to have that only happen once a year.
What about other payments, like the homeowner’s association dues, and the insurance? Those two payments are treated differently than property taxes. First, though, look at the trust document. Does it permit payment of household expenses? If so, then public benefits rules do not prohibit payment of HOA and insurance bills — except that the HOA dues might be a problem to the extent that they include water, garbage pickup or other utilities, and the insurance may be a problem if it is required by a mortgage lender.
What about utilities? Does that mean they can’t be paid? Once again, look first at the trust document. Assuming it permits these payments, you can then consider the public benefits rules. Generally speaking they may allow payment of utilities, but with a reduction in SSI payments. Some payments may be prohibited by ALTCS rules. The utilities that cause particular problems are water, gas, electricity, and garbage pickup. No problem for internet, telephone, newspaper delivery, and cable subscriptions.
What about home improvements and repairs? Generally speaking they are alright — though if there are others living with your brother there may be issues for some kinds of payments. Talk to us about the details (or, if your brother does not live in Arizona, consult with a lawyer familiar with special needs trusts in his state).
Exhausted? So are we. These rules are too complicated and the repercussions to serious — for that we are sorry. We can help navigate them for Arizona benefits recipients.
Where can I get more information? Good question. If you and your brother do not live in Arizona, you might want to talk with an attorney familiar with the area. Start with the Special Needs Alliance — it includes about 120 lawyers across the country, each of whom spends a considerable amount of time on special needs trusts and public benefits issues.
There is also a really good handbook available for trustees of special needs trusts. It is offered by the Special Needs Alliance, and the price is right — it is free and downloadable directly from the SNA website. If you prefer, you can get a beautifully printed version mailed to you. There are also a number of books on the topic — we favor one called “Managing a Special Needs Trust: A Guide for Trustees“.
Good luck. It isn’t always easy to be trustee of a special needs trust, and we appreciate that the challenges are sometimes legal, sometimes medical, sometimes familial.
If your child has a disability you will have thought about what would happen on your death. Who will take care of your child? Who will pay for that care? Your estate plan can help address those concerns—and should probably include what most in the disability community call a “special needs” trust.
Government benefits can be crucial to the welfare of a child with disabilities. Supplemental Security Income (SSI), Medicaid (in Arizona, AHCCCS or ALTCS), Title XIX and Section 8 housing benefits—each program has its own eligibility rules, but most require that the recipient not have significant assets or income.
Some parents choose to simply disinherit a child with disabilities—not because they love the child any less, but because they fear the loss of those government benefits. At the same time, reliance on government programs leaves parents concerned about who can provide the personal oversight and involvement they bring to their child’s care while they are still able to do so.
Parents of children with disabilities should always consider establishing a trust for the child. A properly drafted trust can help supplement the minimum benefits provided by government programs, without displacing those programs altogether. In this way the parents’ assets can enhance their child’s life without being consumed by the high cost of care.
A special needs trust can provide funds for case management, advocacy, supplemental medical and dental care, therapies not covered by government benefits, companions and other care for the child with disabilities. It can also pay for education, travel, entertainment, visits from (or to) siblings, furniture, adaptive aids and other items that improve the quality of the child’s life.
The central rules governing a special needs trust are that payments should not be made for necessities such as food, clothing or shelter, and that cash distributions are usually not permitted. A carefully drafted trust can, however, permit the trustee to make even those disbursements at least on an occasional basis, and recognizing that there may be a temporary effect on government benefits programs.
One problem that remains is for the parents to select a suitable trustee. Siblings may be the best choice to handle the funds, though they will need special training in what kinds of investments and expenditures they should authorize.
Of course the same principles apply when the person with disabilities is not your child but a grandchild, niece, nephew or simply a family friend. It is essential in all such cases that any inheritance left to anyone who now receives or might later be eligible for government benefits be properly protected. The same can be said for life insurance and retirement benefits, as well.
At Fleming & Curti, PLC, we prepare special needs trusts for our Arizona clients. We also provide assistance and advice to trustees, so that they can protect government benefits while encouraging the independence and autonomy of beneficiaries with disabilities. We regularly counsel parents of children with disabilities, whether they currently receive government benefits or want to protect the possibility of future program eligibility.
For more information about the subject look at our Legal Q&A section on Special Needs Trusts. The Special Needs Alliance, a national affiliation of lawyers with expertise in special needs planning, also maintains a website with useful information and links to practitioners in nearly every state.
