Special Needs Trusts

March 24, 2022

John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts, talks with John Maher about special needs trusts. He explains how these trusts meet the unique needs of special needs people. In particular, he talks about how special needs trusts supplement, but don't supplant the beneficiary's government benefits.

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Podcast Transcription:

Transcription Disclosure: Below is a transcript of the conversation between John Maher and John T. Brennan. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. I'm here today with John Brennan, Senior Vice President of Trust and Financial Services at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, our topic is special needs trusts. Welcome, John.

John Brennan: Hi, John.

What Is a Special Needs Trust?

John Maher: So John, what is a special needs trust?

John Brennan: A special needs trust is a trust for a special needs beneficiary. And when I say special needs beneficiary, think of somebody who's disabled, physically handicapped, mentally handicapped, either or a combination thereof. So it's someone with special needs who has needs and really probably can't attend to everything for themselves.

The special needs trust is a trust that's set up for them, but also allows them some benefits, but at the same time often preserves their public benefits. Meaning the trustee has a duty to make sure that the gifts from the trust do not knock the special needs beneficiary, they do not disqualify them for the public benefits they're receiving from the government state or whichever other entity, for example.

How Special Needs Trusts Affect Benefit Eligibility

John Maher: So if they're getting a Medicaid benefit, for example, then the money that they're getting through the trust doesn't disqualify them for Medicaid?

John Brennan: Correct. And there are certain types of trusts where you can create a trust and not disrupt some of these Medicaid eligibility. There's a type of trust called the D4A trust, for example, where what happens is once the person, the trust beneficiary passes away, the trust might pay the remaining trust corpus over to Medicaid saying, "Hey, we didn't use this."

How Do You Create a Special Needs Trust?

John Maher: Okay. How do you go about creating a special needs trusts?

John Brennan: Well, a special needs trust is created, again, by a competent estate planning attorney. Most specialists in this field would have some familiarity with this type of trust. They are very similar. Really, it can really only be a clause which distinguishes some trust into a special needs trust where the language is typically, the trustee can supplement but not supplant public benefits. So, there's usually language exactly like that where the trust acknowledges the person is on public benefits, receives those benefits, and the language specifies to preserve those benefits, period.

How Does a Special Needs Trust Supplement, Not Supplant?

John Maher: So just explain a little bit what that means, the supplement but not supplant?

John Brennan: Okay. I'll talk a little bit about it in that context of the pros and cons of a special needs trust, because a special needs trust does confer something to a beneficiary. Because as you know, when you're on public benefits, there are wonderful things. We have some generosity in our infrastructure around people with special needs and people with those needs, but those public benefits can't and won't cover everything.

So, you might have a special needs beneficiary… think of somebody who's mentally disabled, lives in a sheltered environment, say, the special needs trust might do something like buy them a bicycle. It might allow them something like transportation to, say, a family reunion once a year in California. It might be the type of thing that might have secondary health problems related to what they have, so maybe it makes sure they have dental care.

A typical bill for a special needs person in a home like I described… telephone, cable television, internet services might not be covered, so something like that, a special needs trust could cover. Hair and nail care. Again, something that's not covered, that would help. Massages, differentials in housing costs, supplemental care, nursing care, therapies, a case manager who might work with the disabled individual, talk to their social worker, arrange care around them. And another thing might be mobility aids, a nice wheelchair, good supports. I'm not sure if hearing aids are covered, but it seems like that's the type of thing it would be. So, all these are stuff that a special needs trust confers.

The challenge with special needs trusts Is that if you have a beneficiary who's deeply disabled and receives benefits from more than one source, they might have social security and disability benefits, they might live in a housing situation, which is income qualified or some other qualifications, there's food stamps, but all these different types of benefits do not have the same rules for eligibility. So, a trustee of special needs trust has to be very careful and that they pay around these benefits and don't alienate the benefits, because the number one rule of a special needs trust is don't disqualify the beneficiary for their benefits. So, what that sometimes can mean, this is all circumstantial, but you can have a special needs trust where it’s tough to spend the assets because the rule of thumb with special needs trust is you're prohibited from spending on food, clothing, shelter.

That might be an overstatement in some circumstances, but it's a good rough guide. But after that, what's left, there's not that much. It could be tough to find a place to spend the money because in some of this stuff I listed above… how many times are you going to get your hair cut? And it's not that expensive. Sometimes it can be tough to go through 100 grand in a special needs trust in 20 years.

Challenge of Using All the Money in a Special Needs Trust

John Maher: And that's because the basic needs like food and clothes and shelter are taken care of usually, like you said, it might be some government organization, Medicaid, and things like that. So really the trust is just for those extra things. And like you said, some of those don't cost all that much or you don't take advantage of them that often. Somebody with special needs may not be doing a lot of traveling and things like that, so you put a lot of money in there and then maybe it just sits there for a while.

John Brennan: And so the other thing to think of is sometimes you have people who sometimes it's not worth them taking public benefits. If you have somebody who's very wealthy… kind of disabled, but, again, wealthy.. you might just have a regular old trust that provides for them and doesn't have the interaction with the government entities.

Who Uses Special Needs Trusts?

John Maher: Talk a little bit more about who a special needs trust is used for.

John Brennan: Well, like I said, it's a variety of types. It can apply to, like I said, disabled children. It's a real concern for parents of disabled children because there's a real need there, sometimes for siblings the trust can be a real burden for them. There's a lot of complexity in these circumstances. And so there is an infrastructure around special needs trusts.

There are some specialized entities which take on special needs trust, where they have a lot of expertise in the public benefits and a lot of expertise in the clinical afflictions of somebody who has special needs. So sometimes there's advocacy groups or outfits where you might be able to pool some of this money with other special needs beneficiaries and have some peace of mind that your loved one with special needs will get care and attention.

Tax Implications of a Special Needs Trust

John Maher: What are the tax implications for a special needs trust? John Brennan: They're not that major. I think the major thing, again, you have to watch out for is that if you confer too much benefit on the disabled beneficiary, you don't want them to get a big K-1, which is a share of trust benefits that you get when you're a trust beneficiary. It's like a share of partnership income, and it also applies to trusts. Think of MassHealth, MassHealth is an income, there's income eligibility involved there. So, if you over-income someone, you can knock them off the rolls, which is just not what you want to do. And vis a vie these trusts, you need them or you don't. If you have a special needs beneficiary, you have got to take care of them.

And in my experience, I do see families with these needs. I think it's always great if there's a social worker or a service or a sheltered environment, or someone out there who knows the beneficiary, who acts as a buffer, and who can say, "They really need a new winter coat this year." Somebody who can advocate for them, watch out for them. The trustee in these trusts, they can do the money and the taxes and stuff like that, but there's a whole other skillset. Somebody who can have a nexus with both perhaps the beneficiary's life and their individual needs, if you can find somebody like that. Great. And if this is someone that you're pursuing, look, relationships matter in the trustee business. And they would matter here, the more context, even a professional trustee like ourselves, we like to get in there early because then we get to know the circumstances, which is often helpful towards providing the best care that you can.

Contact Cape Ann Savings Bank to Learn About Special Needs Trusts

John Maher: Can you summarize your thoughts on special needs trusts?

John Brennan: Well, they're great for those who need them. And if you need them, you need them in period. It's great that they're there for special needs individuals.

John Maher: All right. Well, that's really great information, John. Thanks again for speaking with me today.

John Brennan: Sure thing.

John Maher: And for more information, you can contact Cape Ann Savings Trust & Financial Services at 978-283-7079. Or visit the website at capeannsavings.bank.

Investments purchased through the Cape Ann Savings Trust & Financial Services department are not FDIC insured, not FDIC guaranteed, not bank guaranteed and may lose principal value.