President Obama just signed a new law that allows First Party Special Needs Trusts to be established by mentally competent individuals for their own benefit.  This is a major “fix” to the current law which only allows First Party Special Needs Trusts to be set up by a parent, grandparent, guardian or a court.  For those individuals who have no living parent or grandparent (or have no relationship with them) and do not have or need a legal guardian, this law will avoid the time and money spent to have a court create such a Trust.

Under a First-Party Special Needs Trust the trustee can use trust assets to supplement (but not replace) any benefits or governmental assistance such person is or may become entitled to receive.  All assets held in such a Trust will not “count” as assets of the disabled person for purpose of qualifying for government benefits.

A First-Party Special Needs Trust is a trust created to own the assets currently owned in the name of a person with special needs. These assets may be gifts or bequests from well- meaning family or friends that were given to person with special needs either outright or in a trust that does not qualify as a special needs trust.  These may also be assets received by a person with special needs through a lawsuit (such as a medical malpractice action).

A First-Party Trust can only be set up for someone who is deemed disabled under the Social Security Administration definition.  For a minor, a person would be considered disabled if he or she “has a medically determinable physical or mental impairment, which results in marked and severe functional limitations, and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.”  An individual age 18 and older is “disabled” if he or she has a medically determinable physical or mental impairment which results in (i) the inability to do any substantial gainful activity and can be expected to result in death; or (ii) has lasted or can be expected to last for a continuous period of not less than 12 months.

In a First-Party Trust, at the beneficiary’s death, the remaining trust assets will reimburse Medicaid for any monies expended while the Trust was in existence for medical care, home health care or nursing home care of the person with special needs.  Thereafter, any other public assistance programs which have a valid right of reimbursement under state or federal law will be repaid.

Any remaining trust assets will pass to those persons appointed by the person with special needs in his or her Will to receive the assets.  If a person with special needs is under the age of 18 and/or is incompetent, then the assets will pass to those persons entitled to receive the assets under the intestacy laws of New Jersey.

Although First-Party Trusts are helpful and even critical in certain situations, there are several downsides that should be carefully considered before moving forward with the creation of this type of Trust.  First, there is a reimbursement requirement that is described above.  Second, because the state has an interest in the remaining assets in these Trusts, there is substantial state oversight of investments and distributions from the Trust.  Therefore, a person who is or may receive government benefits who has assets in his or her own name should speak with an attorney to carefully review the best options under the circumstances.

Many parents, especially parents of young children, may be unsure at the time they are drafting their Wills if a child will qualify for government assistance in the future. The parents may be concerned that a child has a special need but may not know the extent when that child is young. Therefore, parents are hesitant to mandate that assets pass to their child in a special needs trust when such child may or may not need a special needs trust in the future.

An effective way to handle this situation is to draft a discretionary trust for the benefit of such child that allows the trustees the flexibility to create a special needs trust if the need arises in the future. A discretionary trust allows the trustees to distribute principal and income to a child for any reason in the trustee’s discretion. Alternatively, the trust could be drafted as a special needs trust now but could direct the trustees to convert the trust to a purely discretionary trust if the child no longer receives government benefits.

Parents should carefully consider the appointment of trustees of such a trust.  Because this is a lifetime trust, a parent should consider naming younger successor trustees and possibly even a corporate trustee to serve if all of the individuals appointed can no longer serve.

A letter of intent provides the caregivers of a child with special needs a roadmap for taking care of that child. A letter of intent gives the parent a forum to communicate his or her wishes and concerns regarding a child as well as to set forth important information that will ease the transition of that child’s care to other family members at a parent’s death.

A letter of intent lists vital contact information such as the names and addresses of doctors, specialists and other caregivers. As importantly, a letter of intent also allows the parent to elaborate on the likes and dislikes of a child, such as food preferences, and daily schedules, such as bedtime routines. A letter of intent is helpful both to caregivers of a child and the trustees of a special needs trust.

A letter of intent is not a legal document – instead, it is a document prepared by a parent describing in detail any information that a parent feels is important for a potential caregiver to know about his or her child. Parents should update their letter of intent at least every year to make sure that all information is current and relevant.

Please contact us if you would like us to provide you with a sample letter of intent to get started.

One issue often overlooked by divorce attorneys as well as their clients is the payment of child support when the couple has a child with special needs. Child support, although paid directly to a spouse, is considered to be an asset of the child for purposes of determining eligibility for means-tested governmental programs. To avoid disqualifying the child from governmental benefits, the divorce agreement should direct child support payments to be made directly to a first party special needs trust, instead of directly to the custodial spouse. The child with special needs will be the sole beneficiary of the trust and the custodial parent will be the trustee. In this way, the child support will be used for the child without disqualifying the child from benefits he or she may receive.

A New Jersey appeals court upheld Medicaid’s denial of benefits after finding that the First Party Special Needs Trust for the benefit of the applicant did not shelter the applicant’s assets.

Medicaid determined, and the court agreed, that a First Party Special Needs Trust will not shelter an applicant’s assets unless and until the Social Security Administration or the New Jersey Disability Review Team determines that the beneficiary of such trust meets the federal definition of “disabled.” In other words, the fact that the applicant may meet the definition of “disabled” is irrelevant unless the Social Security Administration or the state Disability Review Team actually makes this determination.

In addition, the court agreed with Medicaid’s determination that the Special Needs Trust was not an irrevocable trust as required by law because the terms of the Special Needs Trust allowed the trust to terminate if it was deemed an available resource to the beneficiary for purposes of obtaining state or federal benefits.

Interestingly, this Special Needs Trust was previously approved by a New Jersey Law Division judge in connection with the applicant’s workers’ compensation case.

If you or a loved one is the beneficiary of a New Jersey First Party Special Needs Trust, you should have an attorney review the trust in light of this case in order to avoid a similar result.

For the full text of the case, see J.C. v. Division of Medical Assistance and Health Services (N.J. Super. Ct., App. Div., Nos. A-5632-07T25632-07T2, A-6297-07T2, Feb. 8, 2010).