Special Needs Trusts

Family members and friends with a disability need all the help they can get.  Thankfully, we live in a time when there are many programs—federal, state, and local—designed to help those with special needs.  These programs include Supplemental Security Income (SSI), Medicaid, vocational rehabilitation, and subsidized housing.

Many of the programs are means tested.  In other words, they are only available to those with very limited assets and income.

A special needs trust is designed to benefit someone who has a disability and is currently, or may sometime in the future, receive public benefits.  Having a special needs trust can make a big difference in your loved one’s quality of life.

There are two basic kinds of special needs trusts, based on whose assets are used to create the trust:  third-party and self-settled.

Third-Party Special Needs Trusts

If you give money directly to a disabled loved one, they are likely to lose some (or all) of their public benefits.  A gift to a special needs trust is designed to give your loved one extra resources, but still allow let them keep their benefits.

You can create a special needs trust during your lifetime.  But you should also consider the effect of gifts that are part of your estate plan.  An inheritance—either given directly or in a traditional revocable living trust—creates the risk that your beneficiary will lose public benefits.

If a beneficiary of your estate plan is disabled or has special needs, consider the effect that your gift will have on their life.  Will it help them?  Or will your gift simply be wasted because they will lose the public support they are now receiving or could have received?

Self-Settled Special Needs Trusts

When a disabled person wants to protect their own money and maintain eligibility for public benefits, they still at least one option.

Courts had approved of self-settled special needs trusts for years.  The rules for this kind of trust were finally formalized in the Omnibus Budget Reconciliation Act of 1993.  The law is better known as OBRA, and so the trusts are commonly called OBRA trusts.

What makes an OBRA trust different from other special needs trusts is a concept called “payback”.

Here’s how payback works.  Assets in an OBRA trust aren’t counted when looking at their assets for many important public benefits, such as Medicaid and SSI.  That’s a really good deal because a disabled person can create an OBRA trust with their own money—or money that is owed to them, such as from a settlement or inheritance.  And there is no look back period or penalty for creating the OBRA trust.

While they’re alive, the disabled person (or their guardian or an agent under a power of attorney) can use the money in the OBRA trust for anything that the public benefits don’t cover.

In exchange for the right to create the trust, the disabled person agrees to use whatever remains in the trust when they die to reimburse the government for the benefits they received during their life.  Only the OBRA trust assets are used for the reimbursement—not money in a third-party special needs trusts or money from family members.  And if there’s nothing left in the OBRA trust (or not enough), then the government doesn’t get fully reimbursed.   That’s “payback” in a nutshell.

There are two types of OBRA trusts:  non-pooled and pooled.  Non-pooled trusts (also called payback trusts or OBRA d(4)(c) trusts, after the section of law that authorized them) are for disabled people aged 65 and under.  Pooled trusts (also called pooled payback trusts or OBRA d(4)(c) trusts) are for disabled people over the age of 65.

The advantage of the non-pooled trusts is that a private trustee can be used.  The pooled trusts require the assets to be liquidated and invested under the management of an institutional trustee (of which there are only a handful in Illinois authorized to run pooled trusts).