Special Needs Trusts

The terms “special needs”, “supplemental needs”, and “supplemental care” trusts refer to trusts which allow someone who is receiving, or wishes to apply for, public benefits, to keep their own funds while still qualifying for the public benefits program. The public (i.e. government funded) benefits most often needing protection are Medicaid, Supplemental Security Income, food stamps or even HUD housing). The funds in the trust may be used to pay for items not provided by the public benefit programs which are intended to improve the quality of life for the beneficiaries. In almost every instance, a special needs trust will be for the “sole” benefit of the disabled person, there are very few exceptions. There is no specific definition of “special need”, but trusts can spend money on homes, automobiles, education, companion care, therapies not covered by Medicaid, vacations, family visits, electronics, assistive devices, homemaker services, etc.

Whether or not to create a special needs trust is a decision which can only be made after a complete review of the disabled person’s needs, age, family situation, medical condition, support system and an analysis of the potential benefits vs. the drawbacks. SNTs should never be entered into quickly or without a complete explanation of the trust, the role of the trustee and the exceptions of all the parties.

There are three general types of special needs trusts: self-settled trusts, third party trusts, and testamentary trusts.

Self-Settled Trusts (using the disabled individual’s own funds): Federal law allows recipients of public benefits (e.g. SSI and Medicaid) who are both disabled and under the age of 65, to create a trust with their own funds and further provides that funds in that trust will not be countable when determining eligibility for public benefits. The trust must provide that upon the patient’s death, or termination of the trust, any funds remaining in the trust will be subject to repaying the state Medicaid lien. A self-settled trust can only be established by a parent, grandparent, court or legal guardian.

Example: Janice receives SSI and Medicaid benefits. She recovers a settlement from a personal injury suit in the amount of $100,000. Janice’s mother establishes a self-settled trust and funds the trust with the settlement funds. Janice does not lose either her SSI or Medicaid benefits but can access the trust funds to pay for a part-time companion, to purchase computer equipment and for acupuncture treatments which relieve her pain but are not covered by Medicaid. When Janice dies, there is $18,000 remaining in the trust fund. Medicaid provides evidence that it has paid $134,000 for Janice’s medical needs. The trustee pays the remaining $18,000 to Medicaid as payment against its lien and the trust ends.

Third Party Trusts (funded with monies belonging to someone other than the patient): A family member, friend or other interested party can establish a trust for the benefit of a disabled individual without affecting that person’s eligibility for public benefits. There is no pay-back provision in a third party trust. Language must be specifically tailored to give absolute discretion to the Trustee and to eliminate any control the beneficiary/patient ,may have over the funds.

Example: John wants to establish a trust for the benefit of his two disabled adult grandchildren, and to fund the trust using some stock he owns. He creates a third party, discretionary trust of which he is trustee. His daughter, the children’s mother, is the successor trustee. He uses some of the trust funds to purchase computer and computer training for one of his grandchildren, and to send the other on a vacation with a paid companion. When his grandchildren are both deceased, any remaining funds are to be paid to his then living non-disabled grandchildren. Medicaid does not have any lien or right to the trust property when the disabled grandchildren die because the money used to fund the trust belonged to John, not to the disabled grandchildren.

Testamentary Trusts: A testamentary trust is a trust created under your Last Will and Testament. Federal law currently says that funds contained in a testamentary trust do not count as assets of a person receiving public benefits. This rule does not automatically follow to trusts established under revocable living trusts. The safest mechanism for protecting public benefits for a disabled person, while providing a source of funds for additional needs, is to create a testamentary trust.
Example: When doing her estate planning, Sherry creates a trust under Will for her daughter, Jane, who has bipolar illness. Jane is not currently receiving any public benefits, but the trust will protect her eligibility in the future. As with the third party trust, Medicaid has no lien or claim against the balance of the trust upon Jane’s death.

Please click on the following link for an informative article published by the Wisconsin Law Journal regarding the basics of Special Needs Trusts:

Wisconsin Law Journal


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