Legislative Update: Special Needs Trust Fairness Act

 In General

special-needs-fairness-actLegislative Update: Special Needs Trust Fairness Act

On December 7, 2016, by an overwhelmingly affirmative vote of 94 to 5, the Senate approved H.R. 34 a.k.a. the 21st Century Cares Act, a $6.3 billion package of health-related initiatives.  The Act was signed by President Obama on December 13, 2016.  This new law includes the Special Needs Fairness Act – the focus of our update.

This piece of legislation makes the following two word addition to 42 U.S.C. 1396(d)(4)(A), a pre-existing statute regarding who may establish a first-party special needs trust: “…[a special needs trust may be] established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court.” While this may be a seemingly small change, it has big implications.  To understand why, it might be helpful to understand the purpose of the special needs trust.

Background – Why Special Needs Trusts?

Special needs trusts were first enacted by Congress in 1993 as a legal solution to a very real dilemma. For many individuals living with a disability, the costs associated with their needs and care would be financially devastating without government benefits, such as Medicaid and Supplemental Social Security Income (SSI).  However, as these are means-tested benefit programs, such an individual must not have more than $2,000 in assets to qualify.  But what if that individual can still work?  Or what if a parent or grandparent wishes to provide an inheritance to help supplement their care once they are gone?

This is where the special needs trust is the hero of the day – a legal tool that allows an individual with disabilities to maintain eligibility for vital benefits, without sacrificing financial security that will help supplement  the care and expense of living that benefits alone will be insufficient to provide.

With all this in mind, it’s easy to see that not creating a special needs trust isn’t a viable option when an individual’s qualification for benefits is at risk.  Understanding this necessity will provide some helpful context in understanding why a simple two-word addition will have such a positive impact.

What Went Wrong?

Notably, there are different types of special needs trusts:

  • First-party SNT
  • Third-party SNT

The third-party special needs trust is not impacted by the Special Needs Trust Fairness Act, because this is a special needs trust established by someone other than the beneficiary, with funds that are not the beneficiary’s.

First-party trusts are created with the beneficiary’s assets and require that any assets remaining in trust upon the death of the beneficiary will be used first to payback Medicaid monies spent on the beneficiary’s behalf.

The Special Needs Trust Fairness Act sought to remedy a major problem.  Previously the law only allowed a first-party trust to be created by a family member, guardian or court—not the individual with disabilities.  The law prohibited a mentally competent person from establishing their own trust. It was nonsensical, demeaning and inherently unfair.

Consider this: if an individual living with a disability, and who had mental capacity, needed a first-party special needs trust BUT did not have a parent, grandparent, or legal guardian to create a special needs trust for them, they had to petition a local court for the creation of their trust. The court may have even required ongoing supervision of the trust.  The unnecessary costs to all of this only added insult to injury.

The Fix

The Special Needs Fairness Act rectifies this great flaw, restoring not just efficiency, but dignity.  Individuals with disabilities can now create their own first-party special needs trusts.  The Fairness Act will apply to trusts established on or after December 13, 2016, and will impact neither the Social Security Administration’s treatment of trusts nor the Medicaid payback provision that first-party trusts must contain.

It is, indeed, a welcome change with great consequence for Americans with disabilities who heretofore have had to face the insult and unnecessary expenses of what may have been simply an unfortunate drafting oversight.  It will also have an impact in how we, as estate planning attorneys, advise our clients moving forward.

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