Trust administration can be a very challenging responsibility, particularly when a special needs trust is involved. Some of the rules that apply to a special needs trust can be both complex and bewildering. One of the most important considerations with administering a first-party special needs trust is the beneficiary designation. With these particular types of trust, the sole benefit rule can have very important consequences. Depending on the beneficiary designation, needs-based benefits could be in jeopardy.
Understanding how a first-party special needs trust works
A special needs trust is created for the benefit of individuals with disabilities. When it is a first-party special needs trust, the assets belong to that individual but are being held in trust so they can qualify for government needs-based benefits. Third-party special needs trusts are a little different in that the assets being held do not belong to the beneficiary, although they may be used for their benefit.
In order to protect a loved one’s government benefits, the trust must be created in compliance with the required rules for a first-party special needs trust. That is the only way to guarantee that eligibility for government benefits will not be adversely affected. What must be considered is that certain benefits programs like Supplemental Security Income (SSI) and Medicaid are means-tested programs. A means-tested program means that individuals are eligible for benefits only if they have limited financial resources.
What is the “sole benefit” rule?
In order for the first-party special needs trust to operate appropriately, the funds must be used for the “sole benefit” of the person with special needs – hence the “sole benefit rule.” Although this might sound simple enough, complying with the rule is not always that simple. Many transactions inherently benefit someone in addition to the primary beneficiary. For instance, if you purchase an appliance to have installed in the home for the benefit of the person with special needs, it would logically benefit anyone who visits the home. A vehicle would also provide a benefit to anyone who might ride in the vehicle along with the person with special needs.
The good news is that the sole benefit rule is not actually that strict. The rule is more frequently interpreted to mean that any items or services purchased through the trust must be intended primarily for the benefit of the person with special needs. There must also be only one named beneficiary of the trust. If you have questions about compliance issues, let our trust attorneys help.
How courts have interpreted the sole benefit rule
As an example of how courts typically interpret the sole benefit rule, consider this case brought to remove a court-appointed trustee for allegedly violating the sole benefit rule. In that case, it was first decided that the husband who served as the trustee had violated the rule by purchased an accessible resident that he shared with his wife. It was also alleged that his purchase of home appliances through the trust was also a violation of the sole benefit rule. The reasoning was that the husband also benefitted from the modifications to the home and the appliances that had been installed because he lived in the house as well.
The husband appealed and the decision was reversed. The appellate court determined that allow that decision to stand would mean that the husband would be required to live alone or pay rent to stay in the residence with his wife. If he stayed, he would have to purchase separate furniture and appliances, which would be an absurd result.
The challenge of applying the sole benefit rule
There have been situations where trustees use the funds from a special needs trust to pay for a vacation for the beneficiary’s family even though the beneficiary does not need companionship on the trip. This would be typically be considered a violation of the sole benefit rule. If you are responsible for trust administration and you have questions about your whether your transactions are proper, contact one of our attorneys before you use funds from a first-party trust to ensure that you are not violating the sole benefit rule.
Join us for a free seminar today! If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.
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