Special Needs Planning
Special Needs Trusts
There are several kinds of special needs trusts, each serving the primary purpose of providing for the supplemental needs of disabled persons without disqualifying them from public benefits like Medicaid.
How is a Special Needs Trust “Special”?
A “special needs trust,” also known as a “supplemental needs trust,” is used to protect assets for the benefit of a disabled person in a way that does not disqualify the beneficiary from needs-based government benefits like SSI and Medicaid. Since these benefit programs have strict limits on the countable assets an individual can have (usually $2,000), even relatively small gifts or inheritances can disqualify the individual from Medicaid and/or SSI unless the gifts are protected with a special needs trust.
Ordinary trusts disqualify the beneficiary from eligibility for these needs-based government benefit programs because the trust assets are considered to be “available” to pay for the beneficiary’s support and medical care. Special needs trusts direct the trustee not to make distributions for basic support or medical care if government program would otherwise be available to pay for that care. Because the trust assets are not depleted paying for basic medical care and support, the trustee is able to protect and use the trust funds to improve the beneficiary’s quality of life in other ways.
Medicaid cut-backs are increasingly limiting the kinds of medical care paid by their programs. The need for special needs trusts will become more and more crucial for the well-being of those with disabilities. The disabled beneficiary can have a more comfortable and secure life if he can continue to receive government benefits while having the benefit of the trust for supplemental needs.
The trustee of a special needs trust has the “discretionary authority” to pay for almost anything that is not provided by government programs like Medicaid and SSI, but the trustee should be knowledgeable of the restrictions on distributions, and the manner of making those distributions, that SSI and Medicaid law require. Without proper administration of the special needs trust, the beneficiary can lose those government benefits, which might cause the trust assets to be quickly depleted paying for medical care or support.
Two General Types of Special Needs Trusts (SNTs)
Federal and state laws treat the two types of SNTs very differently, but both types of trusts are treated as being “unavailable resources” for purposes of determining the Medicaid or SSI eligibility of a disabled beneficiary.
1. “First Party” or “Medicaid pay-back” Special Needs Trust
Established with the beneficiary’s own funds.
Special needs trusts established with a disabled person’s own assets are called “self-settled” or “first party” trusts because they are funded with the disabled person’s own assets. They are also called “Medicaid pay-back trusts” because of the requirements of the federal law that authorized their creation (42 U.S.C. Sec. 1396p(d)(4)(A)). This statute states that any trust established with an individual’s own assets will be treated as an “available resource” for public benefits eligibility purposes unless:
- The trust is established and funded before the beneficiary’s 65th birthday;
- It is an irrevocable trust established for the supplemental needs of a “disabled person;”
- The trust document requires that discretionary distributions may be made only for the “sole benefit” of a disabled person during the lifetime of the disabled beneficiary;
- The trust is established by a “parent, grandparent, court, or a guardian” of the disabled beneficiary; and
- After the death of the beneficiary, the trustee is required to repay the state(s) for any Medicaid benefits received by the beneficiary (up to the total remaining trust assets) prior to any distributions to remainder beneficiaries.
In spite of the restrictions, these trusts are important in special needs planning, since the disabled beneficiary can usually qualify for medical assistance through Medicaid, permitting the trust assets to be saved for the beneficiary’s other needs. Some of the situations in which they are used include:
- Lawsuit settlements;
- Gifts or inheritances received by the disabled beneficiary;
- Transfer of assets to reduce a disabled person’s existing assets to below the Medicaid eligibility limits when no other insurance is available to the disabled person.
2. “Third Party” Special Needs Trust
Established with gifts paid into the trust by others.
A “third party” special needs trust is used to receive gifts from family members or friends for the benefit of a disabled person in a way that does not disqualify the beneficiary from public benefits like SSI and Medicaid. A third party SNT can be revocable, irrevocable, or testamentary (established under a Will). They are often called “supplemental needs trusts” to distinguish them from “first party” Medicaid pay-back trusts, which are most frequently referred to as “special needs trusts.”
Family members may already assist or support family members who are disabled. For example, an elderly parent may need assistance with care or living expenses, and adult children with intellectual or developmental disabilities may have always lived in their parents’ home. Unfortunately, if the disabled family member needs government benefits like SSI or Medicaid, a gift made directly to the family member can cause huge problems by disqualifying the disabled beneficiary from eligibility for SSI or Medicaid.
If the family members make gifts directly to a supplemental needs trust instead, those government benefits are protected and the trust assets can be available pay for the beneficiary’s supplemental needs.
Third party special needs trusts established by a spouse for the benefit of the other spouse can only be created by Will, as a testamentary supplemental needs trust. A trust established during lifetime by either married person for himself or his spouse would be considered to be “first party” trust and would not be an exempt resource.
Third party supplemental needs trusts have several important advantages:
- The person establishing the trust (the “grantor” or “settlor”) can designate the remainder beneficiaries of the trust.
- There is no “Medicaid-payback” requirement for a third party supplemental needs trust.
- Unlike a First Party Medicaid-payback trust, there is no age limit—the disabled beneficiary can be over 65 years of age when the trust is established and funded.
- The trustee has broader authority to make distributions, which don’t have to be only for the “sole benefit” of the disabled beneficiary.
- Unlike Medicaid-payback trusts, there can be multiple beneficiaries of the trust, and not all the beneficiaries must be disabled.