Recently, we’ve been hearing and reading more and more about "Special Needs Trusts" (SNT). One form of SNT is used to received and administer funds paid to disabled persons as court judgments or settlements for injuries they have received. This is a way to shelter these proceeds so they can be used to help cover the cost of Medical treatment far into the future. Another more traditional form of SNT is used by parents to meet the needs of their disabled children. The parents are usually concerned about how they can make sure their children’s needs are met once they are gone.

Regardless of the type of SNT, the fundamental purpose is the same, to maximize the amount of health-care coverage available to the beneficiary, first by ensuring the beneficiary is eligible for government funding (such as through Medicaid or SSI), and then from the SNT. For this to work, the trust must contain certain required discretionary language that ensures the funds will not be considered "available" and therefore "countable" against the beneficiary. In the traditional trust, the Settlor places assets into the SNT and authorizes the use of funds by the to supplement, but not replace, the benefits available from governmental programs.

You’ve all heard the horror stories about social security. The social security Trust fund will be broke by 2050. No, it will only make it to 2040. No, it will be broke by 2026. Speculation is rife and no one wants to bite the bullet and take whatever action might be necessary to fix this program, especially in an election year.

Similar concerns are being raised about other federal and state government programs as government tightens budgets and looks at ways to reduce the burden of the public assistance programs. Many parents are worried that once they are gone, their disabled children will be left without the means to obtain required Medical Care. As a result, they are looking to alternative sources. This is why they are concerned with protecting the trust funds they have set aside for their disabled children. Once these trust funds are gone, their children will be left without any protection at all. This is especially true for the more severely disabled children who have no way to earn money to replace what they are forced to pay for their health and medical needs.

Fortunately, more and more of you are becoming familiar with the concept of Special Needs Trusts. The problem is with the complexity in the law and the need for your attorney to throughly understand the requirements in order to protect your trust assets from being invaded. An improperly drafted trust will create more problems than its solves.

The first type of SNT I mentioned above is the court-directed trusts. The rules are very precise on how the trust should be structured and it has to be approved by the Court and by the Oklahoma State DHS general counsel’s office before it can take effect. Because of the safe-guards, you can be relatively sure the trust that comes out of the process will be effective.

The third-party trust for a disabled beneficiary is a different creature altogether. Unless it is prepared by an attorney who has extensive experience in preparing these instruments, you risk winding up with a document that is overly complex and which contains extraneous language which can actually prove harmful to the beneficiary. My personal rule of thumb is that simpler is better.

The key to a successful special needs trust is properly drafted discretionary language. If the trust were to require mandatory distributions of income or principal, the beneficiary could easily receive too much income in a given month or months and suddenly find herself disqualified from receiving governmental benefits. Since normally you intent is for the funds in the Trust to augment public funding, not replace it, mandatory language could quickly defeat the very reason for which the trust was created.

Since the rules are convoluted and difficult to understand at best, not to mention that they change at random times without any apparent rhyme or reason, the preferred approach is to avoid listing specific purposes for which distributions may be made. This approach is normally followed with supplemental needs trusts, which are one form of SNT.

Sometimes the Settlor who creates the trust wants to provide a detailed listing of the services and items for which trust funds maybe used to help guide the trustee in fulfilling the settlor’s intent. If this approach is followed, careful drafting is necessary to ensure the purpose of the trust is not defeated.

There are several different types of special needs trusts. These include the traditional SNT that is created by a third-party, normally a parent or parents, which is designed to ensure a disabled beneficiary is eligible for Medicaid and SSI. In addition to the third-party trust and the court-created trust, there are also self-settled trusts and trusts created by third parties for the benefit of a beneficiary, by using the beneficiary’s own assets. Different rules, different concerns and different consequences flow to each of these types of trusts.

If you have a child or other beneficiary who is disabled or otherwise dysfunctional, the key to successful planning is having the right advisors. The attorney you select to draft your plan should have a thorough understanding of the Medicaid and SSI rules and requirements. These programs are designed to help meet the needs of low-income and low-asset individuals. The caps on income (currently $1,693.00) and assets ($2,000.00) are deliberately set very low. SSI is a federally run cash assistance program which benefits disabled individuals with minimal income and assets. If a beneficiary is eligible for SSI, he or she is automatically qualified for Medicaid. These beneficiaries may also qualify for food stamps or even low income housing, but the primary benefit provided to eligible individuals is medical and long-term nursing care. In combination, these costs can reach $4,000-$5,000 per month or more, which could quickly deplete the funds in a trust if it was forced to be the primary payer.

Some people look askance at those who seek governmental assistance. They need to consider the alternative. If the disabled beneficiary exhausts the assets in his trust fund and the government then cuts back on the benefits provided under Medicaid and/or SSI, who is going to step forward and make sure the beneficiary receives the care and treatment he needs. Fencing these funds so they can only be used to supplement government benefits just makes good sense.