Special Needs Trusts

Investing & Retiring, Trusts

There are two avenues of government assistance to disabled Americans – Supplemental Security Income (SSI) or Medicaid. To qualify for these programs, generally a person must meet the definition of disabled as defined by the Social Security Administration, must have resources of less than $2,000 and the disability must prevent them from holding a job.

If you have a relative that falls into this definition, you may want to help him or her with gifts of cash or other assets. Unfortunately, doing that puts his or her existing benefits in jeopardy because of the asset limitation. To give financial assistance without endangering benefit qualifications, you need to set up a Special Needs Trust (SNT, also known as a Supplemental Needs Trust).

A properly constructed SNT does not count as a resource against SSI/Medicaid benefits (since the assets belong to the trust and not the disabled beneficiary), and does not result in an ineligibility period. All SNTs are irrevocable trusts by definition and are protected from creditors and judgments.

SNTs require appointment of a trustee, who will manage the funds for the beneficiary. The beneficiary has no control over the funds, and cannot receive cash from the fund. SNTs cannot be used for the basic needs of food, clothing and shelter, but they can be used to pay for a wide variety of things for the benefit of the disabled beneficiary, including personal care and rehabilitation, medical and dental expenses, entertainment and travel, education, and tax and legal advice.

Due to the complexity of the law, it is best to use a professional trustee instead of family members, unless they are uniquely qualified for the job.

There are three basic types of Special Needs Trust.

  • First Party Trust – Also called a self-settled trust, or a “(d)(4)(A)” trust for the subsection of the establishing law. A first party trust is funded with the beneficiary’s money and set up by parents, grandparents, guardians, or a court.

    The source of the money can be existing assets, inheritances, personal injury settlements, or any other source that belongs to the disabled person. Cash, investments, real estate, and other assets may fund a first-party trust. The beneficiary must be younger than 65 when the trust is funded.

    Doesn’t this form of trust allow any disabled person to qualify for Medicaid, regardless of their wealth? Yes, it does. However, a first person trust has a “pay back the state” requirement – upon the end of the trust (typically in death), the trustee must reimburse Medicaid for the accumulated benefits over the life of the beneficiary prior to any other disposition except taxes. The trustee distributes any remaining assets according to the directive of the trust.

    In essence, government benefits to a first-party trust beneficiary aren’t so much benefits are they are an interest-free loan.

  • Pooled Trust – A pooled trust, or a “(d)(4)(C)” trust, is essentially a first party trust with the combined resources of several disabled beneficiaries, run by a non-profit organization. The major difference is that pooled trusts can only be funded with cash.

    Administrative costs are lower in this case, but you must be clear on the disposition of assets after death. The payback provision still applies, but the remainder may be left with the trust, depending on the terms.

  • Third Party Trust – Known as (c)(2)(B)(iii) or (c)(2)(B)(iv) trusts depending on who the beneficiary is, these are funded with the assets of third parties. Family members, friends, distant relatives, total strangers – anyone’s money but the beneficiary’s money can be used.

    Third party trusts are subject to state and not federal law, and as a result there is no reimbursement necessary for Medicaid/SSI benefits. With no age restrictions, they are the only option for those over 65 years old.

    These are often established as a component of a will, and may also be established during the life of the grantor, with further funding provided through inheritance after death.

Laws in this area are very complex, and states may have other limitations and requirements for a special needs trust – or they may offer variations. Should you need to establish one of these trusts, or be asked to serve as a trustee, please seek professional legal guidance. You want to make sure that any aid you offer a person with a disability ends up helping them as much as possible.

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