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At last! Military personnel may name a special needs trust as the beneficiary of their Survivor Benefit Plan (SBP). Prior to the passage of the National Defense Authorization Act of 2015(NDAA ), military personnel could designate only an individual, not a trust, as an SBP beneficiary. This meant that military families lacked a key estate planning tool – a special needs trust – for their retirement benefits. Many years of advocacy by many organizations, including the National Military Family Association, led to the incorporation of the Disabled Child Military Protection Act into the NDAA .
Many “terms of art” such as “first party trusts”, “third party trusts” and “pooled trusts” inhabit the world of special needs. First party trusts are sometimes called “section (d)(4)(A) trusts”, which is a reference to the Federal law that created these trusts. The disabled child is the original owner of the funds in a first party trust. For example, a child injured in an automobile accident may use a litigation settlement to fund a first party trust. By contrast, a grandparent, parent, other relative or friend is usually the original owner of the funds used to establish a third party trust. There is one significant difference between a first party special needs trust and third party special needs trust. Federal law requires first party trusts to contain provisions to reimburse Medicaid for the care and services expended on behalf of the disabled individual. A third party trust does not need to contain a payback provision.
Pooled trust are what the title suggests. A corporate fiduciary, usually a non-profit, gathers numerous special needs trusts into a master pooled trust. Each trust has its own separate account, but the pooled trust manages and invests the funds in aggregate. Until 2012, Pennsylvania required pooled trusts to repay one half of the sums remaining in a separate trust to the Commonwealth after the beneficiary’s death. A federal appeals court struck down this limitation. Now, a pooled trust may retain the funds to benefit other disabled individuals who have their own trusts under the master trust’s umbrella.
Under the NDAA , service members may direct their SBP to a first party trust special needs trust for the sole benefit of a disabled beneficiary. Generally, an individual is disabled under the Social Security Act if she cannot support herself because of a mental or physical impairment. The NDAA also allows a first party trust funded by a SBP to become part of a pooled trust.
The importance of the NDAA cannot be understated. Without the protection afforded by a special needs trust, an inherited SBP could disqualify a disabled individual from Supplemental Security Income and Medicaid. Given a disabled individual’s health care needs, maintaining Medicaid eligibility is vital. An SBP placed into a special needs trust will allow continued eligibility for Medicaid and access to things not covered by Medicaid. Often, these goods and services, such as clothing, medical equipment, and computers, provide the stability and quality of life that everyone wishes for their family.
*The views expressed in this article are those of the author; this article in no way conveys any views of the U.S. Army or the Department of Defense. This article is for informational purposes and does not constitute legal advice.
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