Publications
Administration Of Special Needs Trusts: Extraordinary Duties For Trustees
11/09/2011
Corporate trust officers have a great deal of experience determining how to properly exercise their fiduciary duty to make discretionary payments of income and/or principal for the beneficiaries of the trusts they administer. The administration of a special needs trust, and in particular, the determination of what constitutes a “special need” for which expenditures properly may be made, requires an additional layer of knowledge and expertise on a trust officer’s part.
The purpose of a special needs trust is to hold assets for the benefit of a disabled person in a manner that will not jeopardize the person’s eligibility for government benefits. Trust officers thus need to be mindful of appropriate expenditures so that the assets of the trust are not considered “available resources” that would disqualify the disabled person from receiving benefits. Most special needs trusts provide that funds may not be disbursed from the trust if the proposed expenditure is provided as a benefit from any governmental agency. Special needs trusts are not intended to pay for basic support, food or shelter expenses.
There are two broad categories of special needs trusts: (1) a first party special needs trust, and (ii) a third party special needs trust. A first party special needs trust is funded with the disabled person’s own assets and must meet certain statutory requirements. During the lifetime of the disabled person, distributions from the trust must be used for the sole benefit of the disabled person. First party special needs trusts are often referred to as “payback trusts” because, at the death of the disabled person, funds remaining in the trust must be used to reimburse the Commonwealth of Pennsylvania for benefits paid on behalf of the disabled person.
A third party special needs trust is funded with money from a source other than the disabled person - perhaps a parent or a grandparent. Third party special needs trusts may be created in a parent’s will or as a separate trust document during the lifetime of a parent or other donor, and are sometimes referred to as “supplemental needs trusts.” One key difference between a first party special needs trust and a third party special needs trust is that a third party special needs trust does not need to include a “payback” provision for the Commonwealth of Pennsylvania for benefits paid on behalf of a disabled person. A third party special needs trust typically includes other possible beneficiaries to whom the trustees may make discretionary distributions during the lifetime of the disabled person, as well as remainder beneficiaries.
Because of restrictions placed upon special needs trusts, and indirectly the trustees, a trust officer administering a special needs trust must have a fundamental understanding of the basic government entitlement programs, including Social Security Disability Income (SSDI), Supplemental Security Income (SSI), Medicare and Medicaid (also known as Medical Assistance or MA). The Medicaid program includes some basic health insurance for disabled persons which becomes a key issue when the trust officer seeks to supplement medical expenses and supplies from a special needs trust.
First party special needs trusts are subject to the scrutiny of the Orphans’ Court and the Pennsylvania Department of Public Welfare (DPW) with regard to expenditures of principal. The trustee of a first party special needs trust generally will seek court approval and will request consent from DPW before making principal expenditures. In some cases, the trustee may obtain blanket approval for ongoing expenses. Third party special needs trusts do not have this limitation, but a thorough understanding of the governmental benefit programs is critical to determine if a desired expenditure, however legitimate, is properly disbursable as a “special need.”
In summary, trust officers need to have additional expertise to properly administer a special needs trust. We at Barley Snyder have extensive experience and expertise in advising trustees of their extraordinary duties as they seek to enrich a disabled person’s life while only paying for expenses that properly qualify as “special needs.”
The purpose of a special needs trust is to hold assets for the benefit of a disabled person in a manner that will not jeopardize the person’s eligibility for government benefits. Trust officers thus need to be mindful of appropriate expenditures so that the assets of the trust are not considered “available resources” that would disqualify the disabled person from receiving benefits. Most special needs trusts provide that funds may not be disbursed from the trust if the proposed expenditure is provided as a benefit from any governmental agency. Special needs trusts are not intended to pay for basic support, food or shelter expenses.
There are two broad categories of special needs trusts: (1) a first party special needs trust, and (ii) a third party special needs trust. A first party special needs trust is funded with the disabled person’s own assets and must meet certain statutory requirements. During the lifetime of the disabled person, distributions from the trust must be used for the sole benefit of the disabled person. First party special needs trusts are often referred to as “payback trusts” because, at the death of the disabled person, funds remaining in the trust must be used to reimburse the Commonwealth of Pennsylvania for benefits paid on behalf of the disabled person.
A third party special needs trust is funded with money from a source other than the disabled person - perhaps a parent or a grandparent. Third party special needs trusts may be created in a parent’s will or as a separate trust document during the lifetime of a parent or other donor, and are sometimes referred to as “supplemental needs trusts.” One key difference between a first party special needs trust and a third party special needs trust is that a third party special needs trust does not need to include a “payback” provision for the Commonwealth of Pennsylvania for benefits paid on behalf of a disabled person. A third party special needs trust typically includes other possible beneficiaries to whom the trustees may make discretionary distributions during the lifetime of the disabled person, as well as remainder beneficiaries.
Because of restrictions placed upon special needs trusts, and indirectly the trustees, a trust officer administering a special needs trust must have a fundamental understanding of the basic government entitlement programs, including Social Security Disability Income (SSDI), Supplemental Security Income (SSI), Medicare and Medicaid (also known as Medical Assistance or MA). The Medicaid program includes some basic health insurance for disabled persons which becomes a key issue when the trust officer seeks to supplement medical expenses and supplies from a special needs trust.
First party special needs trusts are subject to the scrutiny of the Orphans’ Court and the Pennsylvania Department of Public Welfare (DPW) with regard to expenditures of principal. The trustee of a first party special needs trust generally will seek court approval and will request consent from DPW before making principal expenditures. In some cases, the trustee may obtain blanket approval for ongoing expenses. Third party special needs trusts do not have this limitation, but a thorough understanding of the governmental benefit programs is critical to determine if a desired expenditure, however legitimate, is properly disbursable as a “special need.”
In summary, trust officers need to have additional expertise to properly administer a special needs trust. We at Barley Snyder have extensive experience and expertise in advising trustees of their extraordinary duties as they seek to enrich a disabled person’s life while only paying for expenses that properly qualify as “special needs.”
