Reporting the Existence of A Special Needs Trust to Government Agencies

BY: SHIRLEY B. WHITENACK, ESQ.

Does the existence of a special needs trust have to be disclosed to agencies such as the Social Security Administration (SSA) or Medicaid? The answer depends on the type of special needs trust, whether it is funded or unfunded, and whether federal or state law requires disclosure of the trust.

Basically, there are two types of special needs trusts. A trust which is funded with assets owned by the beneficiary must be irrevocable and is often referred to as a “first party” or self-settled special needs trust. It may also be called a (d)(4)(A) or payback trust because it is governed by federal law found at 42 U.S.C. §1396p(d)(4) (A). This law requires a provision in the trust that assets remaining in the trust upon its termination must be paid back to the agency that provided medical assistance. This type of trust must be funded prior to the time the beneficiary reaches the age of 65 and is established for the sole benefit of the beneficiary by a competent adult beneficiary or the beneficiary’s parent, grandparent, legal guardian or a court. Such trusts may be funded with the proceeds of a personal injury settlement or jury award, a direct inheritance by the beneficiary, or other assets that belonged to beneficiary prior to the establishment of the trust.

The other type of special needs trust is known as a “third-party” special needs trust because it is funded with assets owned by individuals other than the trust beneficiary. A third-party special needs trust may be a “stand-alone” or “living” revocable or irrevocable trust or it may be a testamentary trust embedded in the last will and testament of a person other than the beneficiary. A testamentary trust cannot be “activated” prior to the death of the person creating the will.

There is no Medicaid payback requirement for third-party special needs trusts. An individual receiving Supplemental Security Income (“SSI”) or Medicaid benefits is required to advise the SSA and the state Medicaid agency about changes in his or her financial circumstances as a condition of receiving such benefits. The individual also may have an obligation to disclose a change in financial circumstances to an agency that provides subsidized housing to the beneficiary. Such programs benefit adults and children with disabilities who have limited income and resources and therefore are “meanstested.” Although the beneficiary of a special needs trust cannot compel a distribution from the trust, the assets and income may be distributed to or on behalf of the beneficiary and therefore, the funding of a special needs trust is deemed to be a change of financial circumstances. Absent an express provision in a special needs trust, the trust beneficiary or his or her representative payee, guardian or conservator generally is responsible for reporting the existence of a change in financial circumstances to the government agencies.

An unfunded special needs trust need not be disclosed because there has been no change in financial circumstances due to the existence of the trust. A special needs trust that has been funded, however, will need to be disclosed and, in most cases, the trust instrument will have to be submitted for review by the agency to ensure that it was properly drafted. In some states, a self-settled special needs trust must be pre-approved by the Medicaid agency prior to its funding. A funded special needs trust for the benefit of an SSI recipient should be transmitted to the District Office of the SSA along with a cover letter and the beneficiary’s Social Security number. The trust should be sent via certified mail, return receipt requested to prove that the trust was delivered. It’s also prudent to make a copy of the letter and retain it with the proof of mailing in case the agency asserts that it did not receive a copy of the trust. If the trust is approved, the SSA is unlikely to acknowledge its approval other than to continue to pay the beneficiary’s SSI benefits. A special needs trust that was previously approved by the SSA but later is determined to be a resource by that agency may be amended within 90 days to conform with the current SSA policy. The 90-day period begins on the day that the SSA informs the individual or representative payee that the trust requires an amendment. During that time period the assets in the trust will not be considered countable. The time period may be extended for good cause if requested and the individual or his or her representative provides evidence that the disqualifying issue cannot be resolved within the 90-day period. For example, there may be a need to have the trust amendment approved by a court that is unable to decide the matter within the 90-day period. If the 90-day period does not apply because the trust is either new or had not previously been determined not to be a resource, then any future trust amendments will take effect the month following the month of the amendment. If a trust was previously established but was not previously submitted to the SSA, the federal agency will reopen its prior resource determination back to the date of the trust establishment date.

There is no duty to disclose the existence of a special needs trust to the SSA if the beneficiary is receiving Social Security benefits pursuant to a program that is not meanstested such as the Social Security Disability Insurance (“SSDI”) program. This program pays benefits to an “insured” worker and certain family members if the worker worked long enough and recently enough and paid Social Security taxes on his or her earnings. Similarly, there is no duty to disclose the trust if the beneficiary is receiving Medicare but not Medicaid benefits. If the SSA or the state Medicaid agency notifies the trust beneficiary or the trustee that the assets and income in the special needs trust are countable and benefits will cease, there is a short window to appeal the determination. The time in which to appeal the loss of benefits should appear on the notice from the agency.

Gordon F Homes, Jr., CFP, CLU, ChFC, CASL WestPoint Financial Group |Financial Advisor|Special Care Planner 900 E. 96th Street Suite 300 Indianapolis, IN 46240 | 9960 Corporate Campus Dr. #1100 Louisville, KY 40223 T: (317) 567-2005|C: (317) 506-4734|F: (317) 469-2500| Toll Free (800) 903-6380 ghomes@financialguide.com, www.gordonfhomes.com