Special Needs Trusts: To Spend or Not to Spend?

One of the more frequent questions I get from clients is, “What can Special Needs Trust funds be spent on?”  The short-hand answer is that special needs trust funds CANNOT be used to purchase food, pay for routine shelter costs like rent/mortgage/basic utilities, or be spent on something for someone other than the trust beneficiary. Also, the Trustee should NEVER make a cash distribution to the disabled trust beneficiary for any reason.

Whether the client is the Trustee of a Wholly Discretionary 3rd Party Trust or a Medicaid Payback Special Needs Trust, the same distribution rules and restrictions apply. Both these types of trusts fall under the category of “special needs trusts,” but are different when it comes to whose funds the Trust can/should hold.

A Wholly Discretionary 3rd Party Trust holds funds/property owned by someone else besides the disabled trust beneficiary – like monies from a parent/grandparent’s estate or life insurance policy. This type of trust is usually part of a parent’s, grandparent’s, or other relative/friend’s estate plan.

A Medicaid Payback Special Needs Trust holds funds/property that the disabled beneficiary either owns or has a legal interest in. This type of trust can only be established by a parent, grandparent, legal guardian or court.

So, what can a Trustee buy with special needs trust funds ? The list is pretty long and broad as long as you remember the restrictions I mentioned earlier. The Trustee can spend funds on the cost of a cell phone for the beneficiary – both to purchase the phone itself and to carry the service to use the phone.  Trust funds can be used to cover the expenses associated with hobbies the disabled trust beneficiary may enjoy – the cost of crafting supplies, music/art lessons, sporting event tickets, movie tickets, gaming consoles and video games, gym/fitness center/pool memberships, pet/pet supplies/vet services, camera/picture development costs, etc.  The Trustee can pay for school tuition costs and school supplies, as well as transportation services to school (if there is no other funding source/provider for that transportation).  If the disabled beneficiary benefits from certain medical treatments/equipment not covered by Medicaid or private insurance, then special needs trust funds can be used to purchase those items for him or her.

A few things for a Trustee to remember when making a distribution from a special needs trust:

  1. The Trustee can only use the trust funds to purchase goods or services for the SOLE BENEFIT of the disabled trust beneficiary – no gifts either of cash or items/services to anyone else, regardless of how “small” the gift might be.
  2. The Trustee should pay the provider of the goods or services DIRECTLY from the trust funds/accounts.
  3. The Trustee should keep a record/history of distributions made from the special needs trusts, including itemized receipts and proof of payment for the items purchased.

The items/services listed above are a few examples. There are other goods/services special needs trusts funds can be used to purchase depending upon the disabled trust beneficiary’s interests, abilities, and needs.  If you have a question about a specific situation/distribution, you should contact one of the attorneys in Hickman & Lowder’s special needs law practice for more information. The information presented is general legal information and you should always consult an attorney if you have a specific matter you wish to address.

– Posted by Attorney Lisa Montoni Garvin

Posted in Blog, Estate Planning.