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USE OF TRUSTS FOR INDIVIDUALS WITH A DISABILITY

ISSUE

Planning for families with children who have a disability poses special problems. Following is a highlight of the types of trusts available when protecting a child’s government benefits is an important consideration.

DISCUSSION

Different types of trusts are available to meet the needs of a parent who would like to provide for a child with special needs who is a SSI or Medicaid recipient, without affecting the child’s governmental payments. Each type of trust has advantages and disadvantages. A key concept to understand when discussing all of the following trusts is the meaning of “supplemental services.” Supplemental services are services beyond necessities (e.g. food, medical care and shelter) such as entertainment and recreation. In essence, the trust assets can only be spent on items NOT provided for by the beneficiary’s governmental benefits.

  1. WHOLLY DISCRETIONARY TRUST

A wholly discretionary trust contains the assets of one individual (the Grantor), in trust for the benefit of another individual (the Beneficiary). For example, the assets of a deceased parent, held in trust for the benefit of a child with a disability. If the standard for distributions is the trustee’s sole and absolute discretion, or distributions are limited to “Supplemental Services” only, with no provision for any other type of distribution, the trust will be considered unavailable to the beneficiary and will not affect their benefits. This is a significant modification of the Medicaid trust regulations and are based upon changes to Ohio laws effective January 1, 2007.

Advantages: This type of trust will likely be the preferred trust of choice for parents who want to leave assets to a child with a disability. The Trustee can evaluate the beneficiary’s lifestyle and income to make decisions that are best for the beneficiary. Any assets remaining in the trust at the death of the primary beneficiary will pass to other persons or organizations designated in the trust document by the creator of the trust. The creator’s financial advisor or broker can continue to advise the trustee, and assist in investing the trust assets, after the death of the creator.

Disadvantages: The trust cannot be used to protect an individual with a disability’s own assets. The assets must come from a third party (i.e. parents, grandparents, etc.)

Planning Considerations: Likely the trust vehicle of choice for parents. Needs to be drafted by an attorney who is familiar with special needs estate planning and the creator of the trust must choose trustees to handle the trust administration after the parents pass away. 

  1. COMMUNITY FUND MANAGEMENT FOUNDATION MASTER TRUST

The Master Trust is a version of the Wholly Discretionary Trust discussed in Number 1, above. However, it is run by the not-for-profit Community Fund Management Foundation (CFMF) in Cleveland, Ohio. It is available to all Ohioans. There is a minimum initial investment of $15,000 and an application fee. The assets are managed by US Bank. See www.cfmf.org

Advantages: Same advantages as a wholly discretionary trust including the ability to direct the assets remaining at the beneficiary’s death to other family members. A big advantage is the availability of corporate trustee management with a relatively small amount of assets. Thus, there is no need for a family member or friend to serve as trustee. An active board of trustees continuously follow the laws governing such trusts and respond to changes in the law as needed. Distributions from the trust are monitored by the CFMF which has a duty to make sure that the distributions are for supplemental needs only.

Disadvantages: Same as Number 1 above. Because of the use of a corporate trustee, the creator and the trustee lose the ability to control the investment of the trust funds. No flexibility in drafting the trust terms. There is one master trust form.

  1. SPECIAL NEEDS TRUSTS

A special needs trust is statutorily protected under federal and Ohio law from being counted as a resource. USC §1396p(d)(4)(A) and Ohio Rev. Code §5111.151(F). It must be created for a person with a disability, under age 65, by the person’s parent, grandparent, guardian or a court. Funds can only be used for supplemental services.

Advantages: The trust is protected by state and federal statutes and will not affect a recipient’s government benefits.

Disadvantages: The trust property remaining in the trust must be used to reimburse Medicaid for all amounts spent for the beneficiary’s care. The excess, if any, after repayment may be paid to the beneficiary’s estate to pass to his or her heirs/next-of-kin.

Planning considerations: The main type of trust to use to protect a beneficiary’s own assets so that the assets can be spent for supplemental needs. Consider using a special needs trust when a person with a disability inherits a sum of money, receives retroactive Social Security benefits which will disqualify them from Medicaid, as part of a settlement for a person disabled in a tort action, or as a device for saving money in excess of the $1,500 allowed by Medicaid.

  1. POOLED MEDICAID PAYBACK TRUST.

A pooled medicaid payback trust is similar to the Special Needs Trust discussed in Number 3 above and is also protected by federal and Ohio law. USC § 1396p(d)(4)(C) and Ohio Rev. Code 5111.151(F). It must be created for a person with a disability, by the person them self, or by the person’s parent, grandparent, guardian or a court. Funds can only be used for supplemental services. The assets are pooled together for investment purposes. However, each account is tracked separately. There are a few pooled trusts operating in Ohio. The first and largest is run by the not-for-profit Community Fund Management Foundation (CFMF) in Cleveland, Ohio. It is available to all Ohioans with disabilities. The assets are managed by US Bank. See www.cfmf.org

Advantages: The trust is protected by state and federal statutes and will not affect a recipient’s government benefits. Can be opened with relatively small contributions.

Disadvantages: Because of the use of a corporate trustee, the creator loses the ability to control the investment of the funds. No flexibility in drafting the trust terms. There is one agreement for all beneficiaries. Also, the trust property remaining in the trust at the death of the beneficiary must be either left to the non-profit corporation for its charitable works, or be used to reimburse Medicaid for all amounts spent for the beneficiary’s care.

Planning considerations: Uses for this type of trust are the same as for special needs trusts. However, can be used when there is a need or desire for a corporate trustee, when there is not enough trust property available for a corporate trustee to accept the trust, or if the beneficiary does not have a parent or grandparent alive to create the trust and there is no need for a guardian.

  1. SUPPLEMENTAL SERVICES TRUST

A supplemental services trust pursuant to Ohio Rev. Code §1339.51, is a trust which can be created by anyone for a beneficiary who is eligible to receive services from the Department of MRDD or Department of Mental Health. The maximum amount that can be contributed to the trust is $224,000 in the year 2006 (although the amount increases $2000 each year). [NOTE: prior to October 26, 2001 this type of trust could only be a testamentary trust]. The standards of distribution are limited to supplemental services.

Advantages: The trust is statutorily protected under Ohio law and will not affect a recipient’s government benefits.

Disadvantages: At least 50% of the assets remaining in the trust at the beneficiary’s death must be deposited into a state fund to benefit other individuals with a disability. The remaining 50% can be left to charities or other family members as directed by the person creating the trust.

Planning Considerations: This type of trust is not used much today due to statutory changes which allow wholly discretionary trusts to be used such that 100% of the amounts remaining at the death of the beneficiary can pass to individuals or entities chosen by the creator of the trust. (rev 03/09)

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