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Special Needs Trust Fairness Act Passed Committee

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Breaking News: Committee Approves Special Needs Trust Fairness Act in Package!

On July 13, 2016, the House Energy and Commerce Committee approved the Special Needs Trust Fairness Act (H.R. 670) as part of a small legislative package to improve Medicaid!

The Special Needs Trust Fairness Act lets individuals with disabilities, who have the capacity, to create their own special needs trusts.

Special needs trusts allow persons with disabilities to supplement daily living expenses when government benefits alone are insufficient and protects them against the risk of impoverishment.

But under the current law, only a parent, grandparent, legal guardian of the individual, or a court can establish a special needs trust.

Empower persons with disabilities with responsibility for their own life decisions.

The package also includes Medicaid coverage of tobacco cessation services for mothers of newborns and limiting the use of federal Medicaid funds to cosmetic drugs except when medically necessary.


The Special Needs Trust Fairness Act of 2015 seeks to correct a problem many view in the current law that presumes all individuals with disabilities lack the mental capacity to establish their own special needs trusts. Proponents of the bill state this is false and unfair presumption imposes unnecessary legal fees and costs, court delays, and uncertainty on people who can little afford it. The suggested fix is: H.R. 670 which seeks to add the words “the individual” to 42 U.S.C. § 1396(d)(4)(A) to allow people with disabilities to establish their own individual special needs trusts. The Senate passed a companion version of this bill (S. 349) by unanimous consent on September 9, 2015


People with disabilities who want to live active lives face daunting costs to pay for what others do as a matter of course – from getting out of bed, taking a bath, or feeding or clothing oneself – to more complicated tasks – travel, reading and writing, or working productively. Medicaid may cover the medical and remedial costs for many, but of course there are many more expenses incurred during everyday living. Congress has long recognized the limits of Medicaid; in 1993, it authorized two types of special needs trusts that allow people to set aside funds to pay for supplemental care and meet their non-medical needs while retaining Medicaid. And, prior, Congress added ABLE Accounts, which provide tax incentives for individuals with disabilities to save funds for their non-medical disability needs without loss of Medicaid.

The Problem: “The Individual” is Missing from the Statute

In 1993, Congress authorized two kinds of trusts – individual and pooled non-profit trusts. The law, as drafted, allowed individuals with disabilities to place their funds in a pooled non-profit trust, but in another section left out the words “the individual” thereby failing to allow individuals to establish their own special needs trust:

  • Individual trusts “must be established by a parent, grandparent, legal guardian of the individual, or a court.” 42 USC §(d)(4)(A).
  • Pooled Trusts accounts “must be established by a parent, grandparent, legal guardian of such individual, the individual, or a court.” 42 USC (d)(4)(C)(emphasis added).

More recently, in the related ABLE Act, Congress permitted these accounts to be “established by an eligible individual.” P.L. 113-295

Proponents believe there is no valid public policy reason for prohibiting competent individuals with disabilities from establishing their own individual special needs trusts where all of the other, much more significant requirements are met. These requirements are plainly more important than who signed the document; they are, briefly, that the trust or trust account be:

  • Irrevocable.
  • Provide payback to Medicaid following the death of the beneficiary for all of its expenditures for the beneficiary.
  • Managed by a trustee for the “sole benefit” of the disabled individual.

This legislation would, of course, keep all of these requirements in place.


Special Needs Trusts: Planning for Persons with a Disability

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Special Needs Trusts – Choosing the Right Option – Excerpt from an October 9, 2015 Seminar

            Self-settled special needs trusts were authorized by Congress in 1993. The language in the statute is very brief, but raises many issues. “A trust containing the assets of an individual under age 65 who is disabled (as defined in §1614(a)(3)) and which is established for the benefit of such individual by a parent, grandparent, legal guardian of the individual, or a court, if the state will receive all amounts remaining in the trust upon the death of such individual up to the amount equal to the total medical assistance paid on behalf of the individual under a state plan under this title.” Most commonly, self-settled special needs trusts are required in connection with personal injury settlements, but can also be used when a disabled individual receives an inheritance, or is receiving equitable distribution, alimony, or child support.

The purpose of the self-settled special needs trust is to enable the beneficiary to maintain or obtain eligibility for means-tested public benefits such as SSI and Medicaid. Trusts may also be used when the beneficiary is receiving SNAP (formerly Food Stamps) or Section 8 Housing. Beneficiaries receiving SSDI and Medicare do not require a special needs trust, because these benefits are insurance-based rather than means-tested.

Means-tested public benefits have income tests and many, such as SSI and Medicaid, have asset tests. An individual with disabilities who receives the proceeds of a personal injury settlement, an inheritance, equitable distribution, alimony, or child support is likely to be in a financial position that exceeds the income or asset test limit for any given means-tested program. By placing the assets in a properly-drafted self-settled special needs trust, the assets are non-countable. If the trust is administered properly, distributions from the trust on behalf of the beneficiary are generally not considered income.

For some beneficiaries, the SSI payment, Food Stamps, or Section 8 Housing subsidy is important; for most of the beneficiaries, however, the Medicaid benefit is absolutely critical. By placing funds in the self-settled special needs trust, the individual is able to maintain important needs-based public benefits while at the same time enjoying the benefits of the settlement, inheritance, equitable distribution, alimony, or child support.

Clients are often confused as to what they can do for a disabled child or loved one. Many may have some level of experience or knowledge, having associated with many other individuals who they themselves have disabled children. The conversations and preconceptions as to what can be done based on these conversations with friends and acquaintances can be both a blessing and a curse. The blessing is in that they may have a better than average understanding that there are options to protect assets on behalf of the disabled beneficiary, the curse is that there may be a significant amount of misinformation that you may need to navigate through before a client agrees to a specific course of action.

Assessing the Degree of the Beneficiary’s Current and Future Disability Needs.

The purpose of a Special Needs Trust is to see that the money intended for the beneficiary goes to the beneficiary without jeopardizing her or his eligibility for government benefits (e.g., SSI, Medicaid, and Social Security). Secondly, it serves to protect the money from being squandered or inappropriately spent.

In a Special Needs Trust, the trustee has the duty to use the funds to pay for expenses of the beneficiary that supplement (not replace) benefits received from various governmental assistance programs. These “special needs” might include:

  • Fees for attending special-needs facilities.
  • Insurance
  • Rehabilitation
  • Medical and dental expenses.
  • Eye glasses.
  • Transportation
  • Automobile
  • Computers and electronic equipment.
  • Vacations
  • Athletic training and competitions.
  • Companion services/home health assistance.
  • Other items to enhance self-esteem.
  • Training programs.
  • Maintenance
  • Education
  • Entertainment

The Special Needs Trust is a type of discretionary trust in which the trustee is given the power to manage assets in the trust (e.g., to invest trust funds and to sell assets) and the discretion to use trust assets for the benefit of the person with special needs. Trust assets can be in the form of cash, stocks, personal property, and real property. The trust also can own or be the beneficiary of life insurance. [1]

Knowing these options is critical to understanding the drafting and advice you provide a client. If you have a beneficiary that is incapacitated and will remain institutionalized for the remainder of their lives then the Special Needs Trust can be used just as a fallback for the beneficiary as there is little to no likelihood that the beneficiary will be able to use the resources in a manner that materially enhances their life enjoyment. If on the other hand the beneficiary is able to enjoy any of the above referenced activities then the client and the beneficiaries will enjoy the Trust.

[1] “Planning For The Long Term Care Of A Special Needs Individual”, J. David Spiceland, CPA and Craig J. Langstraat, LL.M., Practical Tax Strategies, Volume 73, Number 03, September 2004.