HS 376 - Legal and Financial Issues for Special Needs Families
HS 376 tests the legal architecture that keeps assets from destroying eligibility: who may fund which trust, what must be repaid, who decides, and which documents actually control at death. The exam favors the ownership question - whose money is it? - over drafting minutiae.
Two trust families
- Third-party special needs trust: funded with assets that never belonged to the beneficiary (parents' money, life insurance, grandparents' gifts). No Medicaid payback; the remainder can pass to siblings. Draft it as a discretionary trust with a sole-benefit standard, and give the beneficiary no power to compel distributions.
- First-party (self-settled) trust: funded with the beneficiary's own money - an inheritance received outright, a personal injury settlement, back SSI awards. Under OBRA '93 §1917(d)(4)(A) it must be for the sole benefit of a beneficiary under 65, established by a parent, grandparent, guardian, or court, and it must include a Medicaid payback at death. Pooled trusts under §1917(d)(4)(C) are the nonprofit-run alternative; a first-party sub-account also pays back unless the charity keeps the remainder.
Decision-making authority
Guardianship is the most restrictive option and removes legal capacity; consider limited guardianship, supported decision-making, durable powers of attorney, and health care proxies first. A representative payee manages SSA funds and is not a guardian.
Documents that do the work
A will leaving assets outright to a beneficiary with a disability is a disqualification plan. Use a testamentary or living special needs trust, confirm beneficiary designations name the trust, and write a letter of intent covering routines, providers, medications, and preferences - not a legal document, but the trustee's operating manual.
Worked example
A 30-year-old on SSI and Medicaid receives a $250,000 personal injury settlement. A third-party trust is unavailable because the money is hers. Place it in a §1917(d)(4)(A) first-party trust or a pooled trust sub-account before it is counted as a resource; an ABLE account absorbs only the annual contribution limit and cannot hold this sum. Result: eligibility preserved, with Medicaid payback at death.
Traps
- Funding a third-party trust with the beneficiary's own money, converting it to first-party with payback.
- Naming the beneficiary rather than the trust on life insurance or retirement accounts.
- Omitting the payback clause or ignoring the under-65 requirement.
- Treating ABLE as a substitute for a special needs trust.