For many of us, an unanticipated influx of money leads to getting that remodel off the ground, paying for college, or taking that long-dreamed-of vacation. For persons with disabilities, that same influx can lead to a loss of vital public benefits. The influx means the person needs to seek legal advice on whether to establish a first-party special needs trust (SNT) or join a first-party pooled SNT. See 42 USC §1396p(d)(4)(A) or 42 USC §1396p(d)(4)(C).
Until recently, to an adult with a disability and with capacity, establishing a first-party SNT represented a loss of independence because they needed to ask a parent or grandparent to help them establish the trust. For those adults without a parent or grandparent, the adult had to engage in a convoluted and costly court process. If the adult didn’t or couldn’t involve third parties, the most likely alternative was to establish an account in a pooled SNT. This is no longer the case.
Under the Special Needs Trust Fairness Act (Act), as incorporated in the 21st Century Cures Act, adults with capacity can now establish their own first party SNT using their own funds. See Pub L 114–255, 130 Stat 1033 (no effect on people with disabilities who lack capacity). This change impacts how practitioners and their clients weigh the alternative approaches to sheltering assets for purposes of SSI and Medi-Cal eligibility.
As a result of the Act, should an attorney counsel adult clients with capacity to get out of the “pool”? Not without carefully considering the following factors:
- Trustee: Regardless of who establishes the first-party SNT, the trust needs a trustee. If the trust assets are sufficiently large, a corporate trustee or professional fiduciary with SNT experience can be hired. For smaller trusts, a family member may be willing to administer the SNT without compensation, but they will likely not be as competent as the trustee of a pooled trust, because a family member trustee generally lacks the trust administration and public benefits knowledge.
- Age: To establish a first party SNT, the person with a disability must be under 65 years old; a pooled SNT generally does not have an age limit.
- Timeframe: Pooled SNTs are already in existence and may be joined on short notice to shelter disqualifying income or property that threatens to cause SSI or Medi-Cal ineligibility.
- Expenses: Pooled SNTs charge trustee fees, whereas a first party SNT’s family member trustee may decline to charge a fee. Drafting and implementing a first party SNT costs more than joining an existing pooled SNT.
- Trust Corpus Amount: With a large trust corpus (<$1,000,000), the expense of establishing the first-party SNT and paying for a corporate or professional fiduciary will not unduly diminish the corpus. With a small trust corpus, a pooled trust avoids the cost of establishing the first-party SNT, and the trust likely charges lower fees than those charged by professional fiduciaries. If the individual with a disability knows a trusted and competent person who can act as trustee for low or no cost, a first party SNT may be advisable (though see “Trustee” bullet point above).
For more on the Special Needs Trust Fairness Act and choosing the right first party SNT for your client, see Special Needs Trusts: Planning, Drafting and Administration, chaps 8, 11, and 12.
Other CEBblog™ posts you may find interesting:
- Special Needs Trusts: Providing for People with Disabilities
- No Means No for Successor Trustee of Special Needs Trust With No-Compensation Clause
- 529A Accounts for Severely Disabled Individuals
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