Let me lay the groundwork. The person has special needs. In other words, they are disabled for one reason or another: It could be a mental disability; it could be a physical disability; it could be some type of severe health issue.
The disabled person may need assistance with care. Payment for such care is expensive. It does not take long for the assets of the disabled individual to be exhausted.
Federal law has carved an unusual nitch for disabled individuals who are under 65 years of age. The federal law says that the disabled person can set up a trust with the disabled person’s assets and still qualify for government assistance. These types of trusts are highly specialized, have stringent requirements, and are subject to ever-changing federal rules. However, with proper usage, the trust can provide for a vastly improved lifestyle for the disabled person.
There are a couple catches: First, as mentioned above, the person must be under 65 years of age at the time the trust is set up and funded. The trust can go on after the person is 65 years of age, but nothing else can be put into it.
Second, the trust must be what is referred to as a “payback” trust. That means upon the death of the beneficiary (the disabled person), whatever remains in the trust must be used first to pay back any Medicaid benefits paid on behalf of the disabled person. The remaining funds can then go to the disabled person’s heirs or as otherwise directed by the disabled person (if the disabled person has capacity).
There are generally two types of self-settled trusts available in Kansas. The first is commonly referred to as a “d(4)(A) trust.” It is a special needs trust that must be set up by the disabled person’s parent, grandparent or guardian or a court. However, it is “funded” by the disabled person’s assets. A trustee is appointed in the trust. The trust assets can be used to supplement the disabled person’s lifestyle. Upon the death of the disabled person, the remaining assets will be used to “pay back” any Medicaid benefits. If any money remains after that, it goes as directed by the disabled person or to the disabled person’s heirs.
The second type generally available in Kansas is the “pooled trust” or the “d(4)(C) trust.” In this situation, the individual or anyone on behalf of the individual can “join” the recognized pooled trust. An example of a pooled trust is the ARCare Trust here in Kansas. As an example, an individual with special needs who has $50,000 and is under 65 can transfer his/her assets to the pooled trust. The pooled trust has a trustee who manages all funds that have been transferred to the pooled trust. In essence, it is a collective trust. Typically, the pooled trust will charge a joinder fee (currently $500) and a modest annual fee based on the size of the assets transferred to the trust. Upon the death of the disabled person, the remaining funds will be used to repay Medicaid. Any remaining funds will be held by the pooled trust for the benefit of other disabled individuals.
These types of trusts can be of very great benefit. They allow the disabled person to still qualify for Medicaid and other government programs. The trust funds can then be used to supplement the disabled person’s care. As an example, if there is some education or retraining that is not covered by government programs, the funds can be used for that purpose, but they can also be for more mundane things such as a handicap accessible vehicle, medications not covered by government programs, a lift chair and other things of that nature.
Recently, the Social Security Program’s Operations Manual System (“POMS”) was amended. Those regulations now say that if the special needs trust provides for any type of early termination, then the trust may be held invalid.
What does that mean? I have looked at several special needs trusts that say that if the special needs person is for some reason no longer considered to be a special needs person, then the trust can be terminated and the assets delivered to that person. I suspect what has happened is that near the end of life of a special needs person, somebody has figured out that they can just declare that person as no longer having special needs, terminate the trust and deliver the assets to the special needs person, and then upon the death of the special needs person, there will not be any trust assets to pay Medicaid. The change in the rule is designed to curb such inappropriate terminations.
As a practical matter, I know that when I draft a special needs trust, I try to provide a copy of the trust before it is even signed to the Medicaid authorities. I will let them review the trust to be sure that it is in compliance with their regulations, and, provided that it is, then I will allow my clients to proceed with it.
Special needs trusts can be great tools, but they are certainly not a “cookie cutter” tool.