Individuals with disabilities can create their own self-settled trusts
The Special Needs Trust Fairness Act provides that individuals with disabilities can now create their own special needs trusts instead of having to rely on others. The Act was included as Section 5007 of the 21st Century Cures Act which was signed into law by the President on December 13, 2016.
The Act corrects an error in existing law that has created needless delay and legal expense for many disabled individuals. Congress first established rules for special needs trusts in 1993. One common type is the self-funded special needs trust (also known as a (d)(4)(A) trust) which is authorized by Section 42 U.S.C. § 1396p(d)(4)(A) of the Medicaid law.
This type of trust is created from the funds of a disabled beneficiary. It allows a beneficiary who is receiving Medicaid to protect some savings for later use in paying for critical living expenses without losing their equally critical Medicaid benefits.
But due to a drafting error in the 1993 law disabled individuals have not been permitted to create their own trusts. For the past 23 years the law has stated that only a parent, grandparent, legal guardian of the individual, or a court can establish this type of special needs trust. In effect the law has presumed that the disabled individual lacks the mental capacity to handle this aspect of their financial affairs.
This has resulted in unnecessary delays and legal and court costs for individuals who wish to establish a special needs trust but do not have parents or grandparents to help them. These individual have been forced to petition the court to set up the trust.
Last week, the passage of the 21st Century Cures Act finally resolved this issue. The Act amends Section 1917(d)(4)(A) of the Social Security Act (42 U.S.C. 1396p(d)(4)(A)) by inserting “the individual,” after “for the benefit of such individual by.” The effective date of the amendment applies to trusts established on or after Dec. 13, 2016, although there may be pushback in some states until they pass their own state statutes.
Under the new law capable individuals with disabilities are now able to set up their own special needs trust without having to petition the court and undergo unnecessary legal costs.
Distinct from Third-Party SNTs
Self-settled SNTs shouldn’t be confused with thirty-party SNTs, which are trusts funded with assets from family members or other sources, and not with the individual with disability’s own assets. Third party SNTs are a common estate-planning tool used to improve the quality of life of the individual with disabilities. Unlike self-settled SNTs, assets held by third-party SNTs don’t have to be used to repay the Medicaid program for the cost of care provided to the individual with disabilities. Instead, the assets can pass to other family members on death of the individual with disabilities.
Disabled individuals should seek the advice of an experienced elder law/special needs lawyer to help evaluate their options.