Special Needs Trust (SNT) A Roadmap for New Jersey
The desire to protect a disabled child or adult is a basic human expression of care and love for that individual. That concern for his or her protection exists now and extends into the future. Parents, grandparents, and other close relatives and friends want to ensure that the object of this caring is protected into the future, even beyond the lifetimes of the parents, grandparents, etc. However, setting up such a plan can be complicated from a legal, financial, and tax perspective. The purpose of this article is to present explanations of and answers to the development of a SPECIAL NEEDS TRUST (SNT) to preserve the financial security of one of your family’s individuals with a disability.
Establishing a SNT enables you to plan for your disabled loved one, and address many related challenges, including:
- How to protect your disabled child or adult without causing him or her to lose public benefits?;
- How do you protect your other offspring from being over-burdened with the care of their disabled brother or sister?;
- What is a fair distribution of your assets after death between or among all of your heirs?;
- how do you ensure that the fund is well managed?; and
- How do you ensure that the fund is sufficiently financed to accommodate your disabled loved one in the future?
What is a SNT?
The State of New Jersey defines a SNT as a type of trust that preserves the SNT beneficiary’s eligibility for needs-based government benefits, such as Medicaid and Social Security Income (SSI) or public housing. Further, it allows a disabled person’s SNT to receive gifts or other funds, and retain his or her eligibility for the government programs, and not be considered in determining eligibility for those programs. This is because the SNT beneficiary does not own the assets in the trust. The federal law exempts transfer of assets into a SNT from any penalty.
What is the Purpose of the SNT?
SNTs are designed to provide items and services that are unavailable from public or private benefit programs. These include items such as:
- Leisure activities, and
- most things beyond basic necessities.
The SNT’s trustee may use the fund for other purposes if he or she decides that those purposes are in the best interest of the beneficiary. Examples include:
- Medical expenses (including, dental and mental),
- Vehicles for accessibility, or transportation,
- Training or specialized education,
- Home modifications to accommodate the beneficiary’s disability, and
- Quality of life enhancements, such as: electronic equipment, computers, appliances, movies, vacations, and other things which improve the beneficiary’s self-esteem.
Who Creates the SNT?
In New Jersey, only specific individuals can establish a SNT:
● guardian, or
● the court.
Also, SNTs can be set up by the person with the disability (First-Party Special Needs Trust). This is done with his or her own money. This often occurs after one becomes disabled from an accident or medical procedure, and is funded by the proceeds obtained therefrom. The first-party SNT is designed to benefit an individual with a disability who has assets or expects to receive assets that would disqualify him or her from eligibility for public benefits. Examples include:
- Receiving an inheritance,
- Settlement from a lawsuit, or
- Divorce settlement.
How Does the SNT Work?
The SNT is a form of property ownership (money, investments, real estate, or other assets); where one individual (the trustee) manages the property for a beneficiary. The trustee must adhere to instructions and guidelines set forth in the SNT agreement with regards to how and when to spend the money from the trust, and for what purposes. Note: any transfers to the trust after the SNT beneficiary reaches age 65 are prohibited.
Who should be Named as Trustee of a SNT?
Selecting the proper trustee for a SNT is very important. While family members often have the beneficiary’s best interest in mind, they are not always fully knowledgeable of the intricacies involved with SNTs. A professional trustee has the knowledge and expertise to manage the trust. This includes:
- Making proper investments,
- Paying bills,
- Keeping and submitting annual accounts (see below), and
- Preparing tax returns (see below).
However, since a professional trustee may be unfamiliar with the beneficiary and his or her unique needs, a combination of a family member and a professional trustee often works well.
Where the size of the SNT does not justify hiring a professional trustee, a family member trustee would hire attorneys, accountants, and investment advisors on an as-needed basis to assist in the administration of the trust. Another option is using a third-party pooled trust. This can often provide the professional trust administration and financial management as an alternative to a corporate or family trustee.
What Happens to the Assets of the SNT upon the Death of the Beneficiary?
On the death of the SNT beneficiary, the State of New Jersey is the first remainder beneficiary and will receive all amounts remaining in the trust up to an amount equal to the total amount of Medicaid benefits provided to the beneficiary, minus any reimbursement or recovery of Medicaid payments previously received by the state. If there are any remaining assets after repaying the State, they become part of the beneficiary’s estate.
Can a SNT Distribute Cash to the Beneficiary?
Cash distributions from the SNT to the beneficiary must be counted as unearned income. This would result in a reduction of his or her SSI dollar for dollar. This could jeopardize the beneficiary’s Medicaid if the SSI is eliminated. Such a distribution should always be avoided.
Are SNTs subject to Taxes?
Taxes may be assessed on income, gifts, or estate taxes. These must be carefully considered when establishing and managing a SNT.
Annual accountings are required to be sent to the eligibility-determination agency and to the Division of Medical Assistance and Health Services (DMAHS) Beneficiary Administrative Action Unit (BAAU) in Trenton, NJ.
Can Life Insurance Fund a SNT?
Life insurance can fund the SNT. A parent who has a disabled child or loved one, could buy a life insurance policy that uses the death benefit (upon the parent’s demise) fund the SNT.
Can a SNT be revoked?
The SNT is irrevocable. Further, they can only be amended in very limited circumstances. The trusts are in place for the lifetime of the beneficiary, during which time, various circumstances invariably change.
An ABLE account offers a person with disabilities a tax-free savings option that does not interfere with his or her eligibility for means-tested government benefits, such as SSI and Medicaid. SNTs do the same thing. However, the regulations governing both of these types of accounts are different.
ABLE accounts limit eligibility to a person whose disability occurred prior to age 26 and satisfies Social Security’s criteria regarding the disabling condition.
ABLE accounts can be created and managed by:
- the beneficiary, if possible, or
- the parents, or
- guardian, or
- anyone under a power of attorney.
A first-party SNT may be established and by:
- the parents,
- guardian, or
- the court.
A third-party SNT may be established by anyone except the beneficiary.
There are no limits to how many SNTs a person may have or how much money is in each SNT. However, a person may have only one ABLE account, and the total annual contributions are limited to the federal annual gift tax exclusion. Further, any amount over $100,000 in an ABLE account is part of the disabled person’s $2,000 resource limit for SSI and Medicaid eligibility. This causes his or her SSI payments to be suspended until the account balance goes below $100,000.
Which Should You Choose – A SNT or an ABLE Account?
Since the governing regulations are different for a SNT and an ABLE Account, families must consider the special circumstances of the disabled person before establishing either. There are some occasions when it may be beneficial to have both accounts. Contact a special needs planning attorney for the account which is best in your particular set of circumstances.
QUESTIONS AND ANSWERS
SPECIAL NEEDS TRUSTS (SNT)
Question: Do contributions to a SNT qualify for the federal gift tax exclusion?
Answer: No. Contributions to a SNT do not meet the annual tax exemption. There is an exemption if the SNT gives the beneficiary certain withdrawal rights. Doing so, however, would reduce or disqualify his or her disability benefits.
Question: What expenses are not covered by a SNT?
Answer: SNTs are to supplement the basic support the beneficiary receives from government programs such as Medicaid and Social Security Income (SSI). SNTs pay for comforts and extras that are not covered by the government funds.
Question: Can I give or leave a fraction of my real property to a SNT?
Answer: Yes. A fractional portion of your property can be given or left to a SNT and the remaining fraction given or left to others. This can result in complications upon the death of any of the fractional owners. Instead, consider having the property go to a trust which stipulates how the proceeds from the property’s sale get divided.
Question: Who is responsible if a trustee becomes negligent in taxes or other obligations of the SNT?
Answer: The trustee is responsible for anything that adversely affects the SNT due to his or her negligence.
Question: How do you terminate a SNT when the beneficiary loses his or her government benefits?
Answer: This depends on whether it is a first-party SNT or a third-party SNT. For the former, the state Medicaid Agency is reimbursed before any money goes to the beneficiary. For a third-party SNT, the trust usually provides how it is to be terminated.
Question: Who pays the expenses on property owned by a SNT?
Answer: The SNT pays any taxes and insurance. Utility costs should be paid by the beneficiary. If the SNT pays for the utilities, the beneficiary’s SSI benefits may be reduced.
Question: Can the SNT pay for a beneficiary’s special diet?
Answer: Usually yes. The trustee must decide. If he or she decides to have the SNT pay, the beneficiary’s SSI payment may be reduced. To avoid this, have his or her doctor prescribe the diet if it is for medical reasons.
Question: Do co-guardians of a SNT have to make every decision together?
Answer: generally, both co-guardians must agree to a consensus on providing for a beneficiary’s care and living arrangements. If no such consensus can be agreed upon, the matter:
- goes to court for a judge’s decision; or
- agree on an independent third-party’s decision.