If you’re planning to leave property or money to a family member with a disability, careful planning is crucial. Without it, you may jeopardize your relative’s ability to get Medicaid, SSI, and other government benefits. By including a trust in your will, most of these problems are avoided.
Owning furnishings, a vehicle, a house, and personal belongings does not affect a person’s eligibility for Medicaid or SSI (Supplemental Security Income). However, cash and other financial assets may disqualify a disabled person for benefits. For instance, if you leave them $25,000 in cash, they’d no longer be eligible for government benefits.
Special needs trusts are a way to avoid losing eligibility. Instead of leaving assets directly to your family member, you’ll leave them in a trust. You’ll choose a trustee, who will have full discretion over the assets in the trust and can spend them on the beneficiary’s behalf. Because that person will not have control over the assets, Medicaid and SSI administrators will ignore them when determining program eligibility. The trust dissolves when it’s not needed (when the beneficiary passes away or when funding is exhausted). Here, you’ll learn the answers to some common questions about these trusts.
Special Needs Trusts: What Are They?
“Special needs” is an all-encompassing term used to describe trusts that provide benefits without causing a beneficiary to lose eligibility for government benefits.
What Kind of Benefits Can a Beneficiary Get?
Trusts can be used to protect various benefits. Commonly, they’re used to allow Medicaid and SSI beneficiaries to receive extra goods or services.
Does a Trust’s Existence Qualify a Person for Benefits?
A person benefiting from a trust doesn’t gain automatic eligibility for public benefits. They must already be eligible or they must qualify after trust establishment. If a trust is well established, it won’t cause the person to lose any benefits. However, a trust doesn’t make qualification any easier.
What are Supplemental Benefits Trusts?
Some attorneys call these “supplemental benefits trusts” instead of “special needs trusts”. The terms are used interchangeably; however, “supplemental benefits” describes the trust’s purpose rather than imposing a legal limitation.
Who May Establish Such a Trust?
Anyone may set up a special needs trust, but they fall into two categories: third-party and self-settled trusts.
A third-party trust may be established for another person’s benefit. The individual setting up the trust, called the grantor, decides to make some of their own assets available to the beneficiary. A third-party trust is usually established by a parent for a mentally or developmentally disabled child.
Rules of Third-Party Trusts
There are very few rules covering third-party trusts. Because a beneficiary is never entitled to the assets within the trust, the most crucial rule is quite simple: the terms of the trust shouldn’t create an entitlement. If a trustee has discretion to distribute funds to a beneficiary, the trust’s income and principal won’t be counted toward public benefit eligibility requirements.
The Benefits of Third-Party Trusts
The main rule of special needs trusts is that the trust can’t provide shelter, food, or easily convertible assets to a beneficiary. The trust may provide medical treatment, physical therapy, travel, education, entertainment, clothing, companionship, furniture, and certain utilities. Cash distributions are rarely permitted, but limited exceptions exist.
Special Needs Trusts and Rule Changes
At one time, special needs trusts couldn’t pay for articles of clothing. However, as of 2005, that prohibition was dropped by the US government. Some states may disallow clothing as an expenditure, but those rules are often challenged. A trust created before the restriction was dropped may still contain such language, and such documents should be reviewed by legal counsel before determinations are made.
Using Funding From a Trust to Pay Rent or Buy a Home for a Beneficiary
There are rules governing the use of these trusts and other third-party payments for shelter expenses. These rules are challenging to navigate and depend on a beneficiary’s status, and you should get legal advice before making rent- or mortgage-related decisions.
The Ease of Setting Up a Trust
While the concept of a third-party trust is simple, there are several choices involved in its creation. Administration is difficult, and it’s important to hire an attorney with trust and public benefits experience. Though many legal matters can be handled without an attorney’s help, or through a general practice firm, a special needs trust is complex enough to require focused services.
What Are Self-Settled Special Needs Trusts?
Sometimes, public benefit recipients might have assets that keep them from enjoying continued eligibility for those benefits. In these cases, it may be advisable and possible to put those assets into a trust to continue or regain eligibility for benefits such as SSI and Medicaid.
Which Assets Can Go into a Self-Settled Trust?
A self-settled trust is usually established by a person who has received an injury settlement (often arising from the incident that led to the disability) or an inheritance. Rarely, a person with existing wealth determines that it’s best to create a trust for a disabled family member.
If a Trust is Established by the Court or a Guardian, Is it Really Self-Settled?
Yes, it is. US law makes it explicitly clear that trusts established with funds and assets that would have belonged to a person or their conservatorship are self-settled, no matter who signs the documents. In some areas, trustees are called “guardians” instead of “conservators”, but the difference is in name only.
Why Should a Trust be Established?
Why would a person with assets wish to put their money in a trust just to gain eligibility for benefits? Many public benefits are prohibitively expensive when they’re privately paid, and some are unavailable except via the public welfare system.
Are There Any Restrictions on Self-Settled Trusts?
A self-settled trust is more complex than its third-party equivalent. In most cases, but not in every case, self-settled trusts must comply with Federal law dating back to 1993. That law mandates that a self-settled trust should be established by a guardian, a judge, or the beneficiary’s parents. Additionally, a self-settled trust must include provisions repaying state agencies for benefits received, and those payments are made upon the beneficiary’s death. These provisions are commonly referred to as “payback” provisions.
Must a Third-Party or Self-Settled Trust Include a “Payback” Provision?
No, there’s no need. Apart from cases with unusual circumstances, only a self-settled trust must include a “payback” provision that reimburses the state for benefits paid.
Is it Necessary to Hire an Attorney When Creating a Trust?
It’s important to have an experienced attorney on your side when creating a trust. State-specific, complex rules apply to certain types of trusts, and these cases should be handled by a firm with experience. With help from the team at Wilson Ratledge, you can set up a trust that protects your special-needs family member now and well into the future.