Special needs trusts are established for the benefit of disabled individuals and supplement the means-tested government benefits the person receives through their lifetime, like SSI, Medicaid, or a Medicaid Waiver. In order to maintain their government benefits, individuals cannot have “noncountable” assets valued at more than $2,000. Even if they received an inheritance and tried to give it away; there would be a varying period of ineligibility because they would have to use it for their personal medical expenses. The individual could try to pay for their care themselves, but any inheritance would likely be drained rather quickly due to high medical expenses. They can’t give the assets away, because a penalty period would apply.
There are three different types of special needs trusts that can be used in order to protect means-tested government benefits. In general, a trust is an entity that has a Grantor, who is the person who establishes the trust; a Trustee, who administers and controls the trust; and a beneficiary, who receives the benefits of the trust. Without getting into the intricate details, the Trustee may use the trust funds in order to supplement, but not replace, any government benefits the beneficiary may receive. The terms of the trust must comply with your state’s and Social Security’s laws and regulations.
The first type of special needs trust is called a third party supplemental needs trust, which is a trust that is established by someone other than the special needs beneficiary. The Grantor is typically a parent, who then decides on a Trustee to oversee the funds for their special needs child. The trust can be made to start at the time of the parent’s death or immediately after signing. This trust is viewed as another individual’s money, so if properly drafted, the draft does not count as an asset for the special needs beneficiary. The trust is administered for the life of the special needs beneficiary. At the special needs beneficiary’s death, the trust can be distributed to anyone the parent chooses. This is the only trust that does not require the trust to repay means-tested benefits government providers at the special needs beneficiary’s death.
The second type of trust can only be established if the special needs individual is under the age of 65, which means they qualify for a “first-party special needs trust.” This type of trust is primarily used when there is an unplanned windfall, like an inheritance, lawsuit proceeds, or an unexpected gift. The special needs beneficiary is considered the Grantor (establishor) of the trust, which means it is the beneficiary’s money used to establish the trust. The beneficiary can establish the trust to stay eligible for means-tested benefits, and use the trust to supplement their needs throughout their life. The downside of this trust is that at the beneficiary’s death, all means-tested government benefit providers must be paid back at the death of the beneficiary. If any funds remain after the payback, it can then be distributed to other individuals. This should be looked at as an interest free loan provided for the special needs beneficiary. You trade paying for the beneficiary’s care now with the funds for paying for them later, while still using the funds for the beneficiary’s benefit and repayment at death only occurs to the extent money is left in the trust at the Beneficiary’s death.
The third type of trust is a pooled special needs trust, which is often seen as an alternative to a first party special needs trust. This trust is actually established by a nonprofit organization which serves as Trustee. The pooled trust allows multiple beneficiaries to combine their funds with other special needs individuals to achieve lower investment costs while still having professional management. The beneficiary adds their money to the pool under the terms of the non-profit’s master trust agreement and is then given a sub-account in their own name. The sub-account tracks the money that they contributed and can be used for their care. When the beneficiary dies, the remaining money in the sub-account goes to reimburse the government for care provided, but can also be diverted to benefit the charity who manages the trust and, therefore, benefit other entities supporting people who have special needs.
Special needs trusts are an invaluable tool when planning for a person who has special needs. Drafting these trusts in order to comply with Social Security and Medicaid guidelines is often complex and should be done with the help of an experienced special needs planner. If you would like to discuss the establishment of a special needs trust or anything related to planning for a special needs individual, please feel free to reach out to us here.