Differences MatterFirst vs. Third Party SNTs:

Purpose, Structure and Creation

Jane E.

Skelton, Esq.

Sample Scenarios Filip’s mother died, she did not leave a

Will, and all her assets will be distributed outright to Filip.

Fiona is settling a lawsuit and will be receiving a personal injury settlement.

Grace’s husband, Thurston, now resides in a nursing home.

Thad’s parents are planning their estates. Thad’s grandmother wants to make a

lifetime transfer for Thad’s benefit. Grant has been admitted to a nursing

home. He wants to transfer his assets to qualify for Medicaid and to provide for his son, Solomon.

Purpose of an SNT

The purpose of any SNT is to “supplement, not supplant” means-tested public benefits.

Means-tested public benefits are welfare benefits. To be eligible for them, an individual must have limited assets or income or both. The two most common means-tested public benefits are SSI and Medicaid.

SSI Supplemental Security Income (SSI) is a

federal stipend for low-income individuals who are aged (65 or older), blind, or disabled. It is administered by the Social Security Administration but funded from the U.S. Treasury general funds, not the Social Security trust fund. SSI provides monthly income to approximately eight million Americans.

The maximum monthly SSI payment for an individual in 2015 is $733.

The asset limit for SSI eligibility is $2,000 for a single individual and $3,000 for couple.

Medicaid Medicaid provides health coverage to

more than 50 million Americans. It is jointly funded by the federal government and individual states, and it is administered by each state. It covers children, the aged, blind, and/or disabled and others who are financially eligible.

In Maine and most states, a person who is eligible for SSI is automatically eligible for Medicaid, and Medicaid starts the same month as SSI eligibility.

In Maine, the effective asset limit for Medicaid for an individual is $10,000.

In Maine, Medicaid is called MaineCare.

Differences Matter

Not all disability benefits are means-tested. Social Security Disability Insurance (SSDI)

is funded through payroll taxes and is available to those who have a sufficient work history and contributed through payroll taxes. It is a form of insurance and is an entitlement. There is no asset limit for SSDI.

After receiving SSDI for two years, a disabled person will become eligible for Medicare.

SSDI and Medicare are not means-tested. There is no asset limit.

But It Can Be Complicated… Some individuals are “dual eligible” and

are enrolled in both Medicare and Medicaid. And an individual can receive both SSDI and SSI, which the SSA calls “concurrent” benefits.

Others receive Childhood Disability Benefits (CDB) on the record of a retired or deceased parent. The SSA refers to these benefits as SSDI for “adults disabled since childhood” (also called Disabled Adult Child benefits). Although there is no asset limit for the monthly CDB income, assets will have to remain below $2,000 ($10,000 in Maine) for continued eligibility for Medicaid.

Other Means-Tested ProgramsThere are many other federal, state, and municipal means-tested benefits programs. This is a small sample: Housing Assistance (e.g., Section 8) Low Income Home Energy Assistance

Program (LIHEAP) Supplemental Nutrition Assistance

Program (SNAP) Temporary Assistance for Needy Families

(TANF) Women, Infant, and Children Food

Program (WIC)

Proceed with Caution The eligibility rules are different for each

program. It is essential to understand the public benefits the individual receives or for which he or she may apply in the future.

Confirm all the benefits available to the intended beneficiary by collecting documentation directly from the agency. Relying on the client’s representation that he or she is “on disability” is never enough.

The existence of a SNT or distributions from a SNT may actually disqualify an individual for public benefits.

Know what benefits the individual receives or may apply for in the future and analyze how a SNT can help–or hurt–the individual’s particular circumstances.

Remember the Sample Scenarios? Filip’s mother died, she did not leave a Will, and all her

assets will be distributed outright to Filip. Are we concerned if Filip receives only SSDI and Medicare?

Fiona is settling a lawsuit and will be receiving a personal injury settlement. What can we do if we want to protect Fiona’s eligibility for SSI and Medicaid?

Thad’s parents are preparing their Wills, and Thad may at some point in the future need means-tested public benefits. Should a trust be created? If so, what kind?

Thad’s grandmother wants to make a lifetime gift for Thad’s benefit. What are her options?

What should Grace include in her Will?

Solomon’s father has been admitted to a nursing home, and he wants to transfer his assets to qualify for Medicaid and to provide for Solomon. Is there anything he can do?

Alternatives to SNTs

Spend Down – Is it possible to promptly spend down the excess resources on any of the following?

home or home improvements and repairs;

furniture;

clothing, jewelry, and other personal belongings;

books and education, including tuition;

entertainment, including vacations, stereo and television, and magazine and newspaper subscriptions;

motor vehicles and motor vehicle repairs;

funeral expenses through an irrevocable mortuary trust;

legal fees and accountant’s fees;

services of a care manager;

and more.

More Alternatives to SNTs

Medical insurance through the Affordable Care Act

Transfer of assets Coming soon: ABLE Act

accounts, a.k.a. 529A accounts

First Party SNTsv.

Third Party SNTs(And Let’s Not Forget Sole

Benefit Trusts)What Do They All Have in

Common?All SNTs are intended to maximize resources for individuals with disabilities. The SNT is a legal arrangement and a fiduciary relationship that permits the beneficiary of the SNT to receive means-tested public benefits yet have access—at the discretion of the Trustee—to SNT assets. The individual cannot be the Trustee, and the Trustee must have sole discretion with regard to making distributions that can improve the quality of the beneficiary’s life.

Differences Matter. Again. A Lot.The fundamental difference between a first party SNT and a third party SNT is whose assets are used to fund the trust. If a SNT is established for Filip’s

inheritance or Fiona’s PI settlement, it will be a first party SNT, funded with the assets they own or to which they are legally entitled.

If Thurston’s wife or Thad’s parents or Thad’s grandmother create trusts in the scenarios described, they will all be third party SNTs funded with the assets of a third party, that is, someone other than Thurston or Thad.

Two Types of First Party SNTsFirst party trusts are also called self-settled trusts, and they are creatures of statute. Federal law provides for two types of self-settled SNTs:

The (d)(4)(A) SNT gets its name from the statute that authorizes it: 42 U.S.C. § 1396p(d)(4)(A). It must be created for the sole benefit of an individual with disabilities who is under age 65 and by (for now) the individual’s parent, grandparent, guardian, or a court.

A pooled trust is authorized by 42 U.S.C. § 1396p(d)(4)(C). A pooled special needs trust is a trust created and administered by a nonprofit organization. The assets of different individuals with disabilities are administered in the pooled trust, but each beneficiary’s assets are maintained in a separate account.

First Party Trusts (cont.) Remember Fiona and Filip? If they had means-tested benefits like SSI and MaineCare and wanted to maintain eligibility but put away their “excess” assets for future use, either a (d)(4)(A) trust or an account at an existing (d)(4)(C) trust could be used. In both cases, Filip and Fiona would be the

“grantors” of their self-settled trusts or trust accounts.

Yet under current law the (d)(4)(A) cannot be established by Filip or Fiona, only by a parent, a grandparent, a guardian, or a court.

The pooled trust joinder agreement for a (d)(4)(C) trust can be signed by a parent, a grandparent, a guardian, a court, or by the individual whose funds will be transferred to trust.

First Party Trusts (cont.)

A self-settled SNT must be irrevocable. That is, the grantor whose assets were transferred to the trust can have no authority to revoke of terminate the trust.

The (d)(4)(A) trust may only be established for the benefit of an individual under age 65, whereas in some states an account at a (d)(4)(C) trust can be established for someone over age 65.

First Party Trusts (cont.)

A (d)(4)(A) trust must provide that when the beneficiary dies or upon the termination of the trust, the remaining trust assets will be used to “pay back” any state that has provided benefits to the individual under any state’s Medicaid program.

With a (d)(4)(C) trust, the beneficiary’s remaining funds must either stay in the pooled trust for the benefit of the other trust beneficiaries or be used to pay back states that have provided Medicaid benefits.

Third Party SNTs

A third party SNT is created to receive gifts and bequests from third parties, such as parents, grandparents, other family, or friends.

A third party SNT is not a creature of statute.

A third party SNT does not have to include a pay back provision.

A third party SNT is much more flexible than a first party SNT.

Third Party SNTs (cont.)Remember Thad? Thad’s parents are planning their estates. Let’s assume that Thad is receiving SSI and Medicaid and a network of services his parents do not want to disturb. They can do either of the following:

They can provide for Thad by including testamentary trusts in their Wills that would come into effect upon the death of the second of them to die.

Or, they can create a stand-alone trust during life, which they might minimally fund with the intention of funding it upon the death of the second of them. That trust could receive bequests and lifetime gifts from others, including Thad’s grandmother, or she can create her own trust. The stand-alone trust could be revocable or irrevocable, depending on tax issues and non-tax objectives.

Third Party SNTs (cont.)What about Grace? Her husband, Thurston, is in a nursing home. If Grace has consulted an elder law attorney, it is likely that most of the couple’s assets have been transferred to Grace. The elder law attorney may also have guided Grace in getting Thurston eligible for Medicaid benefits. And Grace has probably signed a new Will in case she should die before Thurston. The new Will provides that at least some portion of Grace’s probate assets would be directed to a testamentary special needs trust for Thurston’s benefit. The assets in the trust would not be countable to Thurston for the purpose of continued eligibility for Medicaid benefits, and, after his death, the remaining assets would be distributed as contemplated in Grace’s Will.

Note: This plan can only be established in a Will.

Note: The plan could force Thurston to pursue a spousal elective share after Grace’s death.

Never the Twain Shall Meet The funds of a third party should never

be transferred into a first party trust. If that happens, the funds will be exposed to payback provisions unnecessarily.

The funds of the individual with disabilities should never by transferred into a third party SNT. To do so will “pollute” the trust and risk making all the assets countable to the beneficiary for eligibility purposes.

What about Grant and Solomon?A Sole Benefit Trust is a type of third party special needs with first party features. It can meet the dual goals of qualifying Grant for Medicaid nursing home benefits while benefiting Solomon. Typically, gifts made by an individual within five years of applying for Medicaid nursing home benefits will be subject to a transfer penalty. There is no penalty for transfers to a child with a disability, but that won’t work if Solomon receives SSI and Medicaid. The answer is a Sole Benefit Trust, so that Solomon’s benefits can continue. Like a first party trust, the Sole Benefit Trust is a creature of statute. Some states require a payback provision; others require that the trust be “actuarially sound.”

Differences Really Do Matter The eligibility rules for the public benefits

available to individual with disabilities are different. In particular, some are means-tested and some are not.

Whose assets will be used to fund the trust? That variable makes all the difference in how the trust will be drafted and established.

Different scenarios demand different trusts.

And we didn’t talk about the differing tax treatments for different SNTs.

Viva la difference, but don’t let the differences trip you up.