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Special Needs Trust Update
Posted in Estate Planning

The Special Needs Trust (SNT) allows an individual who has received funds from an accident or from some type of injury to have use of those funds for the individual’s special needs (which can be quite broad) while still being eligible for government benefits, such as Medicaid. If the individual simply received the recovery outright, he or she would not be eligible to receive many government benefits until the entire recovery had been spent.

The price for being able to establish a SNT is that the trust agreement must have a provision that upon the beneficiary’s death, the SNT has to pay back the government agencies for the cost of benefits the beneficiary received during his or her lifetime. Failure to include this payback on death provision would disqualify the trust from receiving special treatment and would also disqualify the beneficiary from being able to receive government benefits.

The government’s payback on death requirement left a void in the law where the SNT could terminate early, i.e. during the beneficiary’s lifetime. No benefits then be paid back to the government agencies, leaving them with no reimbursement for the cost of any government benefits expended on the beneficiary.

To fill this gap, the Social Security Administration (SSA) recently issued Transmittal Notice 43, which altered the SSA’s policy manual, known as POMS. This new requirement, found in POMS section SI 01120.199, provides that if the SNT terminates during the beneficiary’s lifetime, the SNT must state that the trust will reimburse the government agency for the cost of the benefits received by the beneficiary. Therefore, SNTs must now contain this new lifetime payback provision in order for the beneficiary to remain eligible for government benefits.

The new policy requires that the lifetime payback provision must be included in all SNTs created after September 15, 2010. However, this new lifetime or early termination payback policy also applies to all SNTs created after December 31, 1999. Therefore, if an existing SNT created after December 31, 1999 contains a provision allowing for the early termination of the SNT (which may also include a provision permitting small trust termination under state law, or potentially even allowing exhaustion of the principal of the SNT), these SNTs must be amended to comply with the new early termination payback requirements.

The timeline for compliance by post-1999 existing SNTs with these new rules is that the SNT must be amended within 90 days after receipt of government notice that the SNT must be changed to comply. This means that there is no specific deadline by which to make the changes in pre-existing trusts. Rather, it will depend on the date that the trustee or other responsible party for the SNT receives notice that it must meet the new requirements.

This change may create some opportunity in SNT planning. It will now be possible to provide for the lifetime distribution of the trust to a beneficiary who recovers from the injury or accident, so long as the government payback obligation is imposed and met by the SNT when the final distribution is made.

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