Individuals with disabilities can create their own Self-settled Special Needs Trusts.
On Dec. 13, 2016, President Obama signed the 21st Century Cures Act (H.R.34 — 114th Congress (2015-2016)). Section 5007 of the Act, titled “Fairness in Medicaid Supplemental Needs Trusts” incorporates language from the Special Needs Trust Fairness Act of 2015 by adding two words (“the individual”) to an existing statute.
With the stroke of a pen, more than two decades of unfair treatment to individuals with disabilities was ended by now allowing those with capacity to create their own self-settled special needs trust (SNT), without having to go to court.
Prior to enactment of this new law, individuals with disabilities who didn't have a living parent or grandparent couldn't create their own self-settled SNT without going to court. While experienced special needs planning attorneys should still be consulted in drafting an appropriate self-settled SNT, the 21st Century Cures Act empowers capable individuals with disabilities to independently make their own decisions and not be forced to rely on others to advocate for their needs.
In 1993 Congress enacted The Omnibus Budget Reconciliation Act of 1993 (OBRA-1993) as part of a Medicaid overhaul. This law, 42 U.S.C. Section 1396p d(4)(A), permitted a parent, grandparent, guardian or court to establish a self-settled SNT for an individual with disabilities under the age of 65 with the individual's own assets. Self-settled SNTs have become an important planning tool for many individuals with disabilities who are receiving certain government benefits and then receive funds as a result of an inheritance, personal injury lawsuit or otherwise. But for the ability to create a self-settled SNT, those individuals would lose their much-needed government benefits, including Supplemental Security Income (SSI) and Medicaid, which pay for basic living and medical expenses. OBRA-1993 provided that assets contained in a properly drafted self-settled SNT don't disqualify the individual with disabilities from continuing to receive those government benefits.
The assets contained in the SNT may be used to improve the quality of life of the individual with disabilities without sacrificing the government benefits. As a tradeoff however, on the death or earlier termination of the self-settled SNT, Medicaid must be repaid for the cost of care it provided to the individual.
Unfortunately, OBRA-1993 failed to provide a mechanism for individuals with disabilities who had capacity to independently establish a self-settled SNT. There's no apparent reason for this oversight other than perhaps the drafters didn't contemplate that some individuals with physical disabilities do have the requisite mental capacity to create their own trust.
In fact, 42 U.S.C. Section 1396p d(4)(C), enacted as part of OBRA-1993, allows for accounts in a pooled SNT to be established by the individual with disabilities himself. The pooled SNT basically served the same function as the self-settled SNT except that a non-profit association must manage the pooled trust and the individual with disabilities can't select the trustee of the trust. This distinction, between a pooled SNT and a self-settled SNT set up by the individual himself, existed for over 23 years and made no sense.
The inability to set up their own self-settled SNT was especially cumbersome for individuals who didn't have living parents or grandparents and didn't need guardians. Such individuals had to hire a lawyer to commence potentially costly and time consuming court proceedings so that a court could establish the self-settled SNT on their behalf. Many disability advocates felt that the law was discriminatory and didn't grant capable individuals the independence to make their own decisions in establishing trusts.
Last week, the passage of the 21st Century Cures Act finally resolved this issue. The Act amends Section 1917(d)(4)(A) of the Social Security Act (42 U.S.C. 1396p(d)(4)(A)) by inserting “the individual,” after “for the benefit of such individual by.” The passage of this legislation is due, in large part, to the advocacy initiatives of the Special Needs Alliance and National Academy of Elder Law Attorneys. The effective date of the amendment applies to trusts established on or after Dec. 13, 2016, although there may be pushback in some states until they pass their own state statutes.
Distinct from Third-Party SNTs
Self-settled SNTs shouldn't be confused with thirty-party SNTs, which are trusts funded with assets from family members or other sources, and not with the individual with disability's own assets. Third party SNTs are a common estate-planning tool used to improve the quality of life of the individual with disabilities. Unlike self-settled SNTs, assets held by third-party SNTs don't have to be used to repay the Medicaid program for the cost of care provided to the individual with disabilities. Instead, the assets can pass to other family members on death of the individual with disabilities.
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This article was provided by Bernard A. Krooks and Amy C. O'Hara, Wealth Planning, and brought to you by the Ronald J. Fichera Law Firm, where our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, contact us today!
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