Special Needs Trusts, with Elijah Keyes
Curious about how Special Needs Trusts work in California? Or about the difference between a 1st party SNT and a 3rd party SNT? On this week's episode of I Know a Lawyer, I discuss Special Needs Trusts with Elijah Keyes of Keyes Law Group. Elijah is a Certified Legal Specialist in Estate Planning and has extensive experience and knowledge in Special Needs Trusts. In the episode, we discuss:
The difference between 1st party and 3rd party special needs trusts. (01:30)
California's ability to make an estate recovery claim against 1st party trusts. (05:01)
The benefit of having both 1st party and 3rd party trusts. (09:44)
What a trustee can and can't do. (12:30)
Pitfalls. (16:28)
Special needs trusts for persons with addiction problems. (19:37)
Thank you to Elijah for joining me. I learned a great deal more about special needs trusts and I hope the listener did as well. Contact Elijah Keyes at 408-444-7019 or find him at his website: keyeslawgroup.com if you have questions about special needs trust.
This podcast is brought to you by McKenna Brink Signorotti LLP.
Transcript
Ryan Lockhart (00:01):
Hello all. And welcome to I know a lawyer. Glad you are listening today. I know a lawyer is brought to you by McKenna Brink Signorotti, LLP, located in Walnut Creek, California. Check us out at mckennabrink.com. I am Ryan Lockhart, your host, and today I'm joined by Elijah Keyes of Keyes law group. Thanks for joining me, Elijah. How are you today? Doing great. Thanks so much for having me today. Great, thanks for joining me. So why don't you tell the audience a little bit more about you, your practice and where they can reach you?
Elijah Keyes (00:32):
Sure. So I've been a state planning and trust attorney for more than 10 years. I started my own practice this year after being a partner at a different firm, I focus on basic estate planning, meaning revocable trust for families, but a lot of my work has to do with protecting people who have severe diseases and who are elderly and who are disabled. And so some of my work involves certain special needs trusts, which we'll talk about today. People can reach me at my, at my website, which is Keyes law group.com or they can give me a call (408) 444-7019. And that's, that's how I, that's how we can get started.
Ryan Lockhart (01:14):
Awesome. Yes, let's just jump into it. We're going to talk about special needs trust today, and I know this can be a hot topic and at least one that many people have heard the term, but they're not exactly sure what they are and what they do. So why don't you just give us an idea generally about special needs trust?
Elijah Keyes (01:30):
Sure. So especially in these trusts as a tool to essentially shield assets from causing someone to be disqualified from certain types of benefits that the government might provide, there are two very large benefits that we're talking about here in a few others. So we'll kind of ignore those for now. The first one is medical called Medicaid and other States. And the second one is called supplemental security income, also called SSI. So both of those programs often require that someone have a limited amount of assets in their name. They can have a house and they can have a car and they can have, you know, a burial plot and maybe a small insurance policy. Most other assets are going to be called non-exempt meaning that they will disqualify someone. Those might include cash stocks, ons, sometimes even a retirement account, like a 401k or an IRA.
Elijah Keyes (02:25):
But assets held in a special needs trust for the benefit of someone who's receiving those benefits like medical or SSI, they don't disqualify them. So while someone can have $50,000 in a special needs trust and be qualified for SSI benefits, which can be, you know, substantial almost a thousand dollars a month they can't have $50,000 in their own name and be able to qualify. So it's worth it oftentimes to have money in a special needs trust as a safety net, rather than spending everything so that someone has basically nothing. And then it's on very, very minimal benefits. So
Ryan Lockhart (03:00):
I know that there are two main types of special needs, trusts, first party, and third party. So can you give us a little idea about what the differences are between those?
Elijah Keyes (03:09):
So we, so the, the reason that we call them first party and third party is not because of anything in the law. It is simply a designation of who puts the money into the trust and there's substantial differences. So we're thinking of a first party trust. We're thinking of I, as the first party, Elijah, Elijah is going to have Elijah's trust that is created for Elijah's benefit and Elijah's money goes into Elijah's trust. But if we have yours, if you create a trust for me, it's going to be Ryan creating creating Ryan's trust for Elijah's benefit. But Ryan puts Ryan's money into Ryan's trust. Both of those are special needs trust. Both of them qualify under, under certain under the social security code, which governs special needs trust, but it's a different focus. And it's really important to distinguish between the rules between the two.
Elijah Keyes (04:01):
So a third party trust. We'll start with that first, because it's much more simple, a parent or a family member. Oftentimes it's the one that creates the trust. So a parent creates a trust for a child. A parent puts money into that trust either during life or at death to provide for the child in the future. And if the child then passes away, the money in the trust goes to whomever is designated in the trust as the next beneficiary sometimes called a contingent or a remainder beneficiary. First party trust has many more restrictions. First party trust must be created for someone who is under 65. And oftentimes the trust itself has a limited number of people who can create it. So it has to be created by a parent, a grandparent, a court, a court appointed guardian or conservator. We can talk about those at a later time, if you'd like or now, or recently by the individual.
Elijah Keyes (05:01):
So a 25 year old disabled person who has mental capacity could create their own first party trust. Final limit with the first party trust is who gets the money when the person passes away. And there's some big, big differences here between a third party and a first party trust in a first party trust when, when the beneficiary passes away or the trust otherwise stops functioning also called, called terminates. The state must be notified and any medical benefits which have been spent for the, for the benefit of the individual, like medical for healthcare or medical for nursing home care, the state has a right to try to collect those from the trust. If the state doesn't collect to what extent then the remaining money goes to the other beneficiaries beneficiary.
Ryan Lockhart (05:51):
Yeah. So I've heard, I've heard about this estate claim. Is it pretty common that they will definitely make a claim against the first party SNT
Elijah Keyes (05:58):
Yes, it's very common. There are, there are a couple of ways to get around that and we can discuss that in more detail if you'd like, but in general, the state does not have a very good record keeping ability with regard to medical medical expenditures. They're, they're, they're kind of disorganized. And because of that, oftentimes when we're talking about them making a recovery claim, if it's, if they have recovery claims from several different departments, which is completely feasible oftentimes they kind of screw it up, not all the time, but sometimes, sometimes they miss the ball. There's also a potential that you could negotiate because the it's not an automatic payment that would go to the state. It's a, it's essentially they make a claim and then you can either agree to the claim or you can object to the claim.
Elijah Keyes (06:48):
And so I've seen very large claims in the millions of dollars, but there were millions of dollars assets. And so we were able to do a negotiated sort of settlement where where, you know, the state agreed to take less just because then they wouldn't have to pursue and litigate. Is there a time limit that the state can make this claim? Yeah. So, so when the person passes away, the law requires them to notify. I believe that it's 60 days to what's called the department of healthcare services. That's the, that's the state department that administers the medical federally Medicaid program. But but when we're sorry about that, when we're when we're the recovery claim, then the, the the state then makes the claim. And then we have generally 60 to 90 days to object to that. I'm not sure on the exact timeframe, it's been a couple of months I've dealt with that, but when they come back like a couple of years later, no, well, they can come back a couple of years later, if it turns out that the information that we provided to them was insufficient.
Elijah Keyes (07:52):
And so something that's really important with these, these, these are called recovery claims. Something that's really important with a recovery claim is that we provide enough information to them so that we can satisfy the law, but we don't provide too much information to them to give them enough, enough weight to go on so that then they can come back later. So when, when they, when they issue a final letter, like a letter of satisfaction or a letter of non recovery there's always a caveat in that letter that says that they could come back at a later time. If it, if they deemed that there's more benefits where there's more assets, that is not an automatic thing, there's always a limit on what they can recover and when they can recover it. But it is something to bear in mind that that if, if, if you think that there's some sort of potential recovery claim coming in the future, that you need to consult with someone who can help you understand what's the best way to avoid it.
Elijah Keyes (08:48):
Okay, good. So, and also, just so we're clear third party, special needs trust. We are not worried about these estate recovery, correct? That's correct. Yeah. The third party. So it's, it's fairly common for a family to create a third party trust and a first party trust for a beneficiary, especially if the beneficiary already has money, I'll give you kind of three common situations. So a disabled child has received an inheritance, either life insurance, or maybe maybe money in a 529 account or money that's been given to the parent for the benefit of the child. That's been put into a custodial account, also called a uniform transfers to minors, act account a cutma account. Those, those three situations, what happens is, is the disabled beneficiary now has money in his or her own name. And the parents also want to want to give money to the, to the beneficiary as well to the child as well.
Elijah Keyes (09:44):
So we have two different routes of the money. We have money that's held by the individual beneficiary, and we have money that's held by the parents. So in that case, we have to create two separate trusts, one trust to hold the child's money. That's a first party trust and one trust to hold the parent's money. That's a third party trust. When we create two trusts that are running side by side, we have to look and compare at what is the best case scenario in case we have to spend money because we, we, these trusts are designed so that we can spend money for the beneficiary, but without disqualifying them from benefits, they're there, they're there as a safety net and to provide a better quality of life and assistance. That's why they're there. And so if we're going to spend money out of either one of these trusts that they're private, if their, if their distributions are identical between the two, if the provisions are identical, except for these sort of recovery things with the first party trust, then we spend down the first party trust first, because we don't have to pay the state out of third party trust.
Elijah Keyes (10:38):
It would be a big, big mistake to pay the money out of the third party trust first, and then leave the first party trust there so that the state could come in and try to take whatever they could take. So just as a, as kind of a creditor protection action, that's the term in my field. We will, we would essentially recommend spending down the first party trust and, you know, you can spend it on a lot of things. You, you could, you could go on vacations, you could buy a big TV, you could even buy a house. I remember speaking with a colleague of mine who had set up a trust and the trust had just a whole bunch of money. And so they just bought a house. I've done that plenty of times for my clients. The trust just buys a house and holds it.
Ryan Lockhart (11:22):
That's fine. Yeah. So I've always thought that the term special needs trust was a little, not quite correct. It seems like supplemental needs trust was always like the better term cause they are supplementing the needs. So let's kind of dive into what can a special needs trust or the trustee of this trust. What, what restrictions are on them? Like what can, and can't they use the funds for, for the benefit?
Elijah Keyes (11:44):
So, so let's distinguish special needs and supplemental needs. Special needs is only used in California because California thinks it's special. Yep. The term in the law is a supplemental needs trust. So technically they should be called supplemental needs trust. But in California, the term is special needs. As long as the provisions, which are required by the, by the social security administration code, are there it's, it's, it's the same. You could call it, you know, Wally's special trust, you know, it doesn't matter. What can the trustee do? So the trustee operates with kind of, kind of what I'd call a legal layer cake. We have a, we have federal laws, we have state laws, and then we have the trust laws. And so federal laws are going to say what the trustee should not do, but not what they can or cannot do. That's the federal law regarding benefits for medical and for SSI.
Elijah Keyes (12:34):
So, you know, the social security benefits the the state laws is what all trustees are restricted from doing. So all trustees have, you know, a whole bunch of responsibilities, but we can boil it down to some really simple, simple things that trustee has to work for the benefit of the trust and the beneficiary and the trustee has to not steal. I mean, they, they, and they have to be a wise investor. You know, they, they can't, they can't, they can't spend stuff on stupid things. They can't take the money for themselves. And they, they, they, they have to, they have to use things for the benefit of the person that is intended. Other than that, all the rules are related to the trust. And so the trust itself will have restrictions. And so in my special needs, trust that I create I give the trustee two different scenarios where there's a lot of money or where there's not a lot of money where there's not a lot of money.
Elijah Keyes (13:21):
The trustee is not able to spend anything on the beneficiary that a government agency is required to spend. So let's, let's distinguish that. If, if if the person has medical and medical is required to pay for doctor's visits and medications, then the special needs trust, the trustee cannot pay for things that are related to the individual's medications. They also can't buy health insurance, unless that health insurance is something that medical would not cover. For example, dental, certain types of medical do not cover dental. So the special needs trust could cover dental. There's other things where someone has a, has a disease, has an illness where there are experimental treatments. Medical is not going to cover experimental treatments, medical, sometimes doesn't even cover you know, name, brand medication. So only provide generic. Well, if you think the name brand is better than the trustee can pay for the name brand, but the trustee can not pay for the generic.
Elijah Keyes (14:14):
If Medi-Cal would, more importantly would be SSI. SSI is very strict in its rules and requires that the trustee not give the beneficiary any food or housing or the beneficiary will lose some of their benefits. So can't can't. And then as an SSI SSI scenario, the trustee cannot pay, cannot give the beneficiary cash or a cash substitute like a, like a a gift card cannot, cannot, cannot purchase housing or food for them. But then there's a scenario where, where the special needs trust has a lot of money. Let's pretend that we have a trust, which has $3 million. Why wouldn't we pay for a house for the beneficiary? Why not? I mean, if we buy a house for the beneficiary SSI rules say that we are say that they're going to lose SSI, but the SSI is going to be reduced because they will not, they will not, they will now be given free housing for life. Well, if the trust owns a house, then their SSI benefits are reduced, but they still have the medical provisions that they're supposed to be given.
Elijah Keyes (15:27):
Two different scenarios, two different examples where essentially the trustee has exactly the same requirements except for one. And the one requirements is whether the trustee can buy housing for the beneficiary. That really is a financial question. And we have to ask that question. When, you know, when someone, when someone's thinking about creating a special needs trust, how much money are we looking at putting in this trust? You know, is it going to be funded with insurance? Is it going to be funded with your assets? Is it going to be going to be funded by a rich uncle? You know, is it, is it just, is it going to hold a portion of your things? And we're really trying to run this very leanly because we need this to last for the beneficiary's lifetime. These are the questions that we have to ask.
Ryan Lockhart (16:07):
Yeah. It definitely takes an analysis in these careful thought and informed decisions, because I know there are the SSI rules are pretty strict from my understanding as well. You had way more experience than I do in it. So there's some pitfalls. Is there any, well, as much as let us know if there's any other issue about special needs trusts, you want, wanna at least bring up? Yeah.
Elijah Keyes (16:28):
Big pitfalls that we have to look at is we have to understand what benefits the beneficiaries are receiving. That's really important. I oftentimes sit down with families and they say, okay, we're getting money from the social security administration or son or daughter, father, uncle, whoever it is. And I ask, okay, what type of benefits are they? And they say, we don't know. It's really important to understand what that is because the rules regarding SSI S which is called supplemental security income are very different from the rules, which are called social security, disability, insurance, SSD, social security, disability insurance, our benefits that someone has earned either they have earned, or a parent has earned. It is an insurance payment. It is a guaranteed payment. You can have $50 million and still receive SSD payments. SSI is a means based that may spend at that meeting, that it is only given to people who are sufficiently, who, who don't have enough money to support themselves according to the federal standards, which don't make sense in most parts of the country.
Elijah Keyes (17:33):
But SSI rules say that someone has to have a limited amount of assets. SSD does not. So we have to understand what those benefits are. If someone's looking at social security money coming in, the only thing that they're going to see is they're going to see money coming into their, into their account on the fourth, fifth or of every month. So they have to go to the social security administration or go online or look at their annual benefit statement to see what is this benefit. Best thing they can do is to understand what it is before they make decisions. Other things that they should know is whether they have Medicare or medical or both. You can have both Medicare or medical. Medicare is a, is an earned benefit. It's a benefit that is automatically given. However, a I'm sorry, once it's given it, you have to pay a copay, but it cannot be lost because you have a huge amount of money.
Elijah Keyes (18:22):
So a special needs trust is not going to protect or guarantee Medicare benefits because they're already protected and guaranteed MediCal generally does not met a cow. Most forms of medical are mean spaced, meaning that they rely meaning that you receive benefits. If you have a sufficiently limited number of money or income. And so you have to know what your benefits are. And so it's really important to understand that because if someone comes in and we talk, I might not be able to answer your question. I might not be able to know what it is that you need in order to understand that if, if, if you can't get past that, then talk to an attorney who can help you heal, can help to guide you into how to get that information. And then, you know, then you can finalize whatever plans you need.
Ryan Lockhart (19:07):
Awesome. Well, I learned a lot I know special needs trusts are a real niche specialty, and I'm glad that you are in this area of practice, because I'm like at this question quite a bit from various people with looking to understand how they work. So I think you've definitely illustrated, you know, generally how they work, but I know there's a lot of specifics that people would need to dive into. So my recommendation to the audience is that they have a question about special needs trust, give Elijah call. So Elijah, thanks for joining me. Why don't you tell the audience one more time where they can reach you?
Elijah Keyes (19:37):
Sure you can reach me at Keyes Law Group. That's K E Y E S L a w G R O U p.com. And my phone number is a (408) 444-7019. I I, I forgot to mention one thing about special needs trusts that I think is important to, we still have a moment where I go into sure. So a special needs trust is sometimes used for disabled persons. It can also be used for people who have a severe drug habit, and that's actually very common where, you know, a parent does not want to give a child a big amount of money for, because they'll, they'll burn through it. If they're, if they're using drugs it can be used as a substitute for what's sometimes called the lifetime trust for the, for the child. The, the trustee would be able to limit the assets going to the beneficiary, but it serves a dual purpose because if someone's on drugs, oftentimes they're, you they're engaged in other risky behaviors. And they're likely to become disabled at some time in the future. And so the special needs trust would be able to be used in such a way so that we can protect the individual now and in the future to prevent them from using the money for a drug habit. And then in the event that they become disabled in the future, then the special needs provisions can kick in to protect them longterm.
Ryan Lockhart (20:49):
No, I'm glad you brought that up. And I know we talked about that before, sorry for forgetting, but yeah, that's a definitely a situation. Cause I, you know, as you know, I set up some lifetime trusts for clients and I could absolutely foresee that possibly down the road for some of these client's children, that they might turn into a disabled situation where they are looking for some of those benefits. So having this, is this something that you just draft straight up as a third party SNT, or is it something that kind of can kick into gear as a third party SNT if it's necessary?
Elijah Keyes (21:19):
No, the special needs trust rules are pretty strict with regard to what qualifies for a special needs trust. If you have a trigger that enacts special needs trust provisions, I have seen those disqualified in the past. Good to know. And so I tend to just create a standalone special needs trust. If I create a trust within a separate trust, right? The rules of different States can apply and they can actually move. They can actually serve to change or, or impede the operations of the creation of a special needs trust. And so the best case scenario in my experience is to create a standalone special needs. Trust that automatically qualifies, no matter what.
Ryan Lockhart (21:57):
Well, that's a good distinction. Thanks for clarifying that. Yeah. Anything else? Yeah.
Elijah Keyes (22:01):
No, I don't know. I'll just, I'll plug the web. I'll just remind people where they can find me, et cetera. Keyeslawgroup.Com, K E Y E S L A W G R O U P.com. Or phone number (408) 444-7019. Again,
Ryan Lockhart (22:17):
No, my pleasure Elijah. So audience, you can find the link to his website in the show notes, or you can catch it at our website at McKenna brink. We'll have in the show notes as well. There are links to Elijah's website, Elijah. Thank you very much for a great conversation. I learned a lot and anybody has questions about special needs trust, give Elijah a call or check out his website. Thanks Elijah. This is Ryan Lockhart on I know a lawyer. Thanks everybody for listening. Take care. Bye bye.