Individuals with Special Needs Can Now Create First Party Trusts
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.
As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.
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