I have come across many clients who have a child that qualifies for certain government benefits because the child has special needs. Unfortunately, a well-intentioned gift to a child can, in some cases, inadvertently disqualify the child from the government benefits. In other instances, a child might have become entitled to sizeable funds, such as through a settlement or award in a personal injury lawsuit, which could also disqualify the child from benefits. This is where special needs trusts come into play.
The role of special needs trusts is to provide economic security for a person with special needs without disqualifying them from government benefits. There are three types of special needs trusts, depending on the circumstances: common law discretionary trusts, OBRA-93 payback trusts and pooled trusts.
Common Law Discretionary Trusts:
This type of trust is referred to as “common law” because it arises from a series of court decisions and not from a particular statute. Typically, common law trusts should be used when the source of the funds is coming from a third party, such as money in the form of a gift to the person with the special needs.
There are four primary requirements for establishing a common law discretionary trust.
- The trust must explicitly state that proceeds of the trust are meant to supplement and not supplant public benefits.
- The trust must also require that public benefits be considered by the trustee prior to distribution of any income or principal.
- The trust must be irrevocable, which generally means that once funds from third parties are in the trust, they cannot be removed later by the third party.
- The trustee must have total, absolute and unfettered discretion to pay, or refuse to pay, the income or principal from the trust to the disabled beneficiary. As a result, required periodic payments are not permissible. It is also helpful if there are other beneficiaries of the trust, such as other children of the parents creating the trust.