When it comes to trust administration that involves special needs trusts, the applicable rules can be complicated and confusing. An important component of administering a first-party special needs trust, for example, is who has been designated the beneficiary of the trust. Depending on who will benefit from items or services purchased by the trust, government benefits can be at risk. When special needs trusts are involved, the sole benefit rule is important and must be considered seriously.
The specifics of a first-party special needs trust
First-party special needs trusts are designed for individuals with disabilities, to hold their personal assets so they can qualify for government benefits. A third-party special needs trust is different because it holds assets for the benefit of someone with special needs, but those assets never belonged to the beneficiary.
There are a set of very specific rules that must be followed in establishing a first-party special needs trust so the trust assets will not affect eligibility for government benefits. Certain government benefits programs, such as Supplemental Security Income (SSI) and Medi-Cal are means-tested programs. That means, in order to be eligible for those benefits, a beneficiary must have limited financial resources. Another requirement is that the trust contain a reimbursement provision for any Medi-Cal funds paid on behalf of the trust beneficiary if there is any money remaining in the trust after the beneficiaries death.
Understanding the “sole benefit” rule for first-person special needs trusts
One of the most important requirements for a proper first-person special needs trust is that the trust funds must be used for the “sole benefit” of the individual with special needs. This is often referred to as the “sole benefit” rule. As simple as the concept may seem, defining the rule is not quite as easy because most trust transactions benefit someone else in addition to the primary beneficiary.
For example, if the trust is used to purchase an air conditioner for the beneficiary, anyone else visiting the home would also benefit from the air conditioner. The same would be true of a car, as anyone else who rides in the car would also receive some benefit. However, the rule is not necessarily that strict. Usually, when interpreted, the sole benefit rule means that there is only one beneficiary of the trust and the items and services purchased by the trust are intended primarily for the benefit of the person with special needs.
Court interpretation of the sole benefit rule
In one case that was brought to court on this issue, the spouse of an individual with special needs who was the court-appointed trustee of the trust was removed from the position. The lower court determined that the husband violated the sole benefit rule when he purchased an accessible house that he shared with his wife. He also used trust funds to buy appliances for the home. The lower court reasoned that the husband was also benefiting from those purchases because he also lived in the house.
However, the appellate court reversed the decision. The appellate court held that the decision was incorrect, specifically pointing out that the decision would essentially mean the husband would be required to live alone or be charged rent to stay in the home and have his own separate furniture. As the appellate court noted that result would be absurd.
Interpreting the sole benefit rule is still a challenge
The appellate court decision discussed above demonstrates the flexibility of the sole benefit rule, but that does not make interpreting the rule easier. There are still some limits that need to be understood. The Social Security Administration, for instance, routinely analyze payments that are made from first-person special needs trusts to family members of the beneficiary. The agency needs to ensure that the payments are actually for services rendered to the beneficiary with special needs.
For example, there have been cases where trustees use special needs trust funds to finance a vacation for the beneficiary’s family despite the fact that the beneficiary does not require companionship on the trip. This would be a violation of the sole benefit rule. If you anticipate being involved intrust administration and you have questions about your transactions, contact one of our attorneys before you use trust funds to make sure you are not in violation of sole benefit rule or any other limitations imposed on the special needs trust.
Download our FREE estate planning checklist today! If you have questions regarding trusts or any other trust administration matters, please contact us at the Northern California Center for Estate Planning and Elder Law for a consultation. You can contact us either online or by calling us at (916) 437-3500. We are here to help!