We represent many adults and families of children with disabilities in planning for their legal and financial security. One useful tool is the “special needs trust.” The primary purpose of a special needs trust (SNT) is to hold assets in such a way that they do not become “countable resources” of the beneficiary and thereby disqualify him or her for SSI or Medicaid benefits. Another purpose is to provide for a capable trustee to handle money and property in such a trust for the benefit of a person who may be unable to effectively manage such assets. There are two basic types of SNTs based on who is placing assets in the trust.
Third Party Special Needs Trust. A parent or grandparent can have a trust drafted in her will (or outside her will) which gives the selected trustee the discretion to use the funds in that trust for a child’s “supplemental needs” – that is, his needs which are not met by his public benefits.
Parents of a disabled child who merely leave assets through their wills or trusts to that child or the child’s guardian will unwittingly disqualify the disabled child for Medicaid or SSI assistance. Guardianship funds held for a child are deemed to be resources of that child. It is imperative that families of disabled children or adults take particular care in crafting an estate plan which will access all available resources for the disabled person’s future needs and which will not result in disqualification by accident. Congress has recognized the need to allow for flexibility in such programs to assist the disabled and has acknowledged the use of trusts to do so.
A SNT may be created by the parents, grandparents or anyone else who wishes to establish a fund that can later receive gifts of money or assets for the disabled beneficiary by lifetime gift(s), life insurance, or by last will and testament gifts. The assets in this type trust will be used for the disabled beneficiary’s needs during his/her lifetime, and the assets remaining in the trust at the death of the beneficiary will be distributed to the persons and in the manner prescribed in the trust (such as to other children or family, non-profit groups, etc.). This trust, called a “third party” trust, will not provide for any recovery by Medicaid, thus permitting all the trust assets to be distributed to the designated remainder beneficiaries at the death of the disabled primary beneficiary.
Self-Settled Special Needs Trust. This type trust may be established to receive the funds or assets (such as a lawsuit settlement, inheritance, life insurance benefits) of a disabled person under age 65 and preserve his or her eligibility for Medicaid or SSI benefits.
A SNT created to hold the assets already owned by the beneficiary, or that the beneficiary is entitled to receive through a lawsuit settlement, inheritance or life insurance settlement, is called a “self-settled” trust. Federal law (42 USC §1396p(d)(4)(A)) states that the assets of a disabled person placed in an irrevocable trust for that person’s benefit are exempt as assets for SSI and Medicaid if the trust is:
(A) A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1614(a)(3)) and which is established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a state plan under this title.
Thus, the essential elements of such a trust are: age of the beneficiary; disability; a single beneficiary; a qualified creator of the trust; and repayment to Medicaid upon the beneficiary’s death. The beneficiary whose money or assets are being used to fund the trust must be under age 65 when the trust is established. Under current Medicaid policy, the trust assets retain their exempt status after the beneficiary reaches age 65, but the person’s right to contribute additional assets to the trust terminates at that time. Such a self-settled trust must be created (that is, the trust document signed) by the beneficiary’s parent, grandparent, legal guardian or a court unless the disabled beneficiary is an adult who has legal capacity to sign a trust document to create the trust. A mentally capable individual can establish his/her own trust. At the beneficiary’s death, Medicaid must be first in line to recover from the trust assets the amount Medicaid has paid for the beneficiary’s medical care. Any remaining balance in the SNT can be paid to those persons designated by the creator of the trust (the “remainder beneficiaries”).
NOTE: Parents, grandparents or others who may wish to give the disabled beneficiary money or property during their lifetimes or in their wills should NOT put such gifts in the self-settled SNT. Assets in this trust will be subject to Medicaid’s right to recovery at the beneficiary’s death. They should create a “third party” SNT for the disabled beneficiary, which does not have the Medicaid payback provision. They can then designate the remainder beneficiary(ies) who will receive any trust assets after the disabled beneficiary’s death.
Benefits of Special Needs Trusts
The benefits of special needs trusts for the disabled and their families are obvious. This is a way to preserve assets for the unforeseen future needs of such a person, while achieving current access to entitlement benefits and resources which can cover the costs of medical care and monthly food, clothing and shelter costs. It is well documented that, in many situations in which a disabled person receives an inheritance or litigation settlement, s/he subsequently succumbs to his/her own poor judgment or to the influence of family members or others that results in waste of the settlement proceeds. The SNT can name a professional trustee or co-trustee who will manage and invest the trust assets in a wise manner that will protect the trust funds from such improvident influences and provide security for the beneficiary into the future. And the SNT has certain advantages over a conventional guardianship. Whereas a guardianship is, by state statute, limited in the types of investments the guardian can make (i.e., investments offered by federally-insured financial institutions), a trustee is not limited to those types and has greater latitude and flexibility in the investments which can be made in order to obtain a greater return. Additionally, if settlement of litigation or a probate is the sole reason for establishing a guardianship (such as a “guardianship of the estate” for a minor’s claim), the Chancery Court can approve disbursement of the settlement proceeds to the trustee of the SNT and no guardianship will be necessary.
Call us today for information and assistance with a special needs trust for your family member with a disability.