What does the Affordable Care Act Mean for
Special Needs Trusts?
by, Lesley M. Mehalick, J.D., LL.M.
With the advent of the Affordable Care Act (ACA), persons with disabilities may be able to purchase individual, private, and affordable health care insurance. This is in large part because the ACA mandates that health insurance can no longer be denied based on a pre-existing condition. The ACA further eliminates the lifetime caps that previously made private insurance less desirable, and it limits the amount of out-of-pocket expenses a person can pay each year. The ACA also provides for reduced premiums for certain persons with disabilities who have lower incomes.
If private, affordable health insurance will be available, we must ask the question whether a person with disabilities will still need a special needs trust, which is the only trust that allows a disabled beneficiary to qualify for resource dependent public benefits, such as Medical Assistance and Supplemental Security Income. As discussed below, while there are some very limited situations where the need for a special needs trust will be reduced in light of the ACA, it is clear that most circumstances involving a person with disabilities will still require a special needs trust.
This decision will, of course, be unique to each individual, and will turn upon several factors, including: the source and amount of the trust funds, the person’s competency to manage funds, the amount of other available assets and income, the type of care or services the person requires, the other public benefits the person receives, and the person’s own desires and goals. This article examines this decision with respect to the two types of individual special needs trusts: the self-funded trust (funded with monies of the person with special needs) and the third-party funded trust (funded with monies of family members or friends of the person with special needs).
Self-Funded Special Needs Trusts
A Self-Funded Special Needs Trust is the only trust into which a person with a disability (who is under the age of 65) can transfer his own funds in order to retain eligibility for resource dependent public benefits, including Medical Assistance and Supplemental Security Income. The Trust can provide goods and services for the benefit of the person with special needs during his lifetime, and at his passing, monies remaining in the trust (if any) may be available to reimburse to the State for Medical Assistance provided to that person. Self-funded special needs trusts are often established when a person receives monies outright from a personal injury action or a poorly planned inheritance.
Before making the decision as to whether a special needs trust is necessary, we must first examine the public benefits the person receives. Importantly, if the person receives Supplemental Security Income (SSI), then a special needs trust would be necessary to protect those benefits.
It is necessary to remember that many critical forms of care are not covered through private insurance available under the ACA and that retaining Medical Assistance – which provides the broadest coverage of virtually any insurance – may be highly desirable or even essential. Specifically, the ACA will not provide private health care coverage for nursing home care, long-term residential placements such as ICF/IDs, or certain in-home attendant care. These are all crucial services for many persons with disabilities, and they are funded almost exclusively thorough Medical Assistance and the Waiver programs. While some of these services may be privately paid for (such as nursing home care), the cost can be exorbitant, and privately paying for a lifetime is often not feasible. Thus, if a person with a disability will require these costly types of care, then a special needs trust is likely the best vehicle.
If a person with special needs is a competent, independent adult, who does not need the type of care or benefits described above, and he receives a particularly significant sum of money that will allow him to purchase fully satisfactory private insurance under the ACA, as well as paying for his other needs, then that person may choose not to create a self-funded special needs trust. This would particularly be a viable option where the person receives monthly income through Social Security Disability Insurance (SSDI) and also has Medicare, which are two benefits that are not resource dependent (and would not be affected by the settlement or inheritance). In these cases, the disabled recipient should consider whether a different type of trust, such as a settlement preservation trust, may be a reasonable choice instead of a self-funded special needs trust.
Unless the sum received is significant, the self-funded special needs trust will likely still be necessary because that person may not have sufficient funds to privately pay for health insurance for his lifetime. Of course, if desired (and sufficient funds are available) the special needs trust could pay for the insurance as well while also maintaining Medical Assistance, in order to expand the available choices of physicians and hospitals under both types of insurance.
Third-Party Funded Special Needs Trusts
A Third-Party Funded Special Needs Trust is the type of trust that is typically created as part of an estate plan where a “third-party,” such as a parent, wishes to leave monies to her child or loved one with special needs. So long as this trust is funded solely with monies of third parties and not by the person with disabilities, then there is no reimbursement to the State for Medical Assistance. Thus, when the trust ends, the remaining monies can pass to other family members, loved ones or charities.
In most cases, a parent of a child with special needs will still want to utilize a third party special needs trust because it will not only protect that person’s eligibility for public benefits, should they be needed, but the trust will also provide an important role as a money management tool. A trustee will be in charge of managing and distributing the monies, and that trustee will ensure that the monies are not mis-used or wasted. The Trust will also protect the child with special needs from any designing persons who may otherwise try to take advantage of the child’s monies. The Trust monies can only be used for the child and cannot be given away to other persons. Thus, a third-party funded special needs trust can protect the child in many ways.
As noted above, the third-party funded special needs trust could pay for private health insurance if appropriate. Additionally, depending upon how the trust is drafted, it may contain a provision that allows the trustee to terminate the trust if the trustee believes it is no longer needed. Thus, if the individual with special needs has private insurance and is capable of managing the funds himself, then the trustee could choose to terminate the trust and distribute the funds to the disabled beneficiary. This decision rests with the trustee, and he need not terminate the trust if he does not believe it is in the child’s best interests.
Overall, since the third-party funded trust 1) has no payback requirement to the state, 2) it protects the person’s eligibility for public benefits, and 3) provides an important money management tool, we do not anticipate that the ACA will significantly change the need for a third party funded special needs trust in most estate plans.
The decision of whether to use a special needs trust is a complex one that must be carefully examined in combination with all of the unique circumstances in each individual situation.