Protect Public Benefits for a Disabled Loved One with a Special Needs Trust

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Protect Public Benefits for a Disabled Loved One with a Special Needs Trust

Special benefits, such as Supplemental Security Income (SSI) and Medicaid, help people with disabilities manage their long-term care needs. However, eligibility for these benefits are contingent on the individual’s income and assets, which can change as a result of a settlement or inheritance. That’s one of the primary issues Special Needs Trusts are intended to help remedy.

Special Needs Trusts are designed to help those with special needs keep more of their income, assets, settlements, and inheritance or gifts without losing their eligibility for public benefits. These public benefits are often crucial to the well-being of disabled individuals in that they are the primary source for the medical care they require throughout their life. If such an individual were to receive a substantial increase to their income or assets (usually from a legal settlement or well-intentioned inheritance), they would become responsible to pay for their long-term care needs by their own means until they’ve depleted nearly all of their new income and/or assets. Establishing a Special Needs Trust can help protect against this happening.

There are three types of Special Needs Trusts to consider, with some important distinctions – primarily who establishes and funds the trust, and what happens to the remaining assets in the trust upon the death of the trust’s beneficiary:

  1.       First Party Special Needs Trusts
  2.       Pooled Special Needs Trusts
  3.       Third Party Supplemental Needs Trusts

First Party Special Needs Trusts

Trust Establishment and Funding

First Party Special Needs Trusts are called “first party” because they are funded by assets owned by the trust beneficiary – the disabled individual the trust is set up to benefit. However, these trusts still require someone other than the beneficiary to establish and serve as grantor for the trust: a parent, grandparent, legal guardian, or the court.

This type of trust is often selected when the disabled individual is going to receive a settlement from a personal injury case, or an inheritance with a value of greater than $2,000. Without this trust in place, funds intended to benefit the disabled individual often can disqualify them from important public and healthcare benefits.

To be able to establish a First Party Special Needs Trust, the beneficiary must be disabled as defined by the Social Security Act and younger than 65 when the trust is funded. The trust must also be created and administrated for the sole benefit of the individual with the disabilities (the beneficiary), although the funds should not be intended to provide basic support such as food and shelter.

Trust Termination and Disbursement

First Party Special Needs Trusts are irrevocable, meaning that once established they can only be changed or terminated by the beneficiary – not by anyone else, including the trustee. These trusts also require what is called a “payback” provision. This means that when the beneficiary of a First Party Special Needs Trust dies (or when the trust is otherwise terminated), the remaining assets in the trust goes to the state to help cover or offset the medical benefits the beneficiary received during their lifetime.

Pooled Special Needs Trusts

Trust Establishment and Funding

Pooled Special Needs Trusts are funded with assets that are owned by the trust beneficiary, and pooled with other disabled beneficiaries under the trust. These trusts are established and managed by non-profit organizations, who manage the pooled assets for greater efficiency and financial opportunities. This efficiency also generally makes for less trust administrative costs to the beneficiary. And unlike First Party Special Needs Trusts, which require a grantor other than the beneficiary, a disabled individual can establish a sub account in a Pooled Special Needs Trust directly. This allows a beneficiary without surviving parents, grandparents or a legal guardian – and those without a lot of money to place into the trust – to protect their public benefits when coming into an inheritance or other assets. It is also significant to note that Pooled Special Needs Trusts can only be funded with cash, not assets such as real estate or other investments.

Trust Termination and Disbursement

Like a First Party Special Needs Trust, all Pooled Special Needs Trusts in New York State are irrevocable and require a payback provision. For a list of non-profits that establish and manage Pooled Special Needs Trusts in New York State, click here: http://www.wnylc.com/health/entry/4/

Third Party Supplemental Needs Trusts

Trust Establishment and Funding

The establishing and funding of Third Party Supplemental Needs Trusts has different requirements than the preceding two types of trusts; they cannot be funded in any part with funds or assets belonging to the beneficiary. Instead, they are funded with assets owned by parents, relatives, and/or friends. Often these types of Special Needs Trusts are created under a will (called a testamentary trust) as a means for relatives and friends to leave an inheritance to a disabled individual without risking their eligibility for SSI and Medicaid benefits.

Alternately, a Third Party Supplemental Needs Trust can be made as a “living trust”, which means it is established and administered while the trustee is still living. This allows parents, friends or guardians to use assets from the trust to pay for medical and other expenses of the beneficiary that are not covered by public benefits. These trusts can also be made revocable, so that the trustee can make changes or terminate the trust at any point in the future. Because of the larger extent of control the trustee has with a Third Party Supplemental Needs Trust, and because the trustee is also required to more actively manage the trust, it is often prudent to appoint a professional trustee for assistance.

Trust Termination and Disbursement

Because a Third Party Special Needs Trust is not funded in any part by the beneficiary, there are no payback provisions required. Instead, the trustees can determine who should receive the remaining assets upon the death of the beneficiary – much like a traditional will. If these provisions are not explicitly covered in the trust, generally the remaining assets are paid out to any children of the disabled individual first, and to surviving relatives next in accordance to state succession law.

Establishment and Periodic Review of a Special Needs Trust

A Special Needs Trust is an excellent way to help provide for a disabled loved one while protecting their eligibility for SSI, Medicaid and other public assistance. An attorney is not required for the establishment of some trusts, but because of the potential complexities inherent in their establishment and administration, as well as the ramifications of not selecting the appropriate type of trust or mismanagement of it, you are well-advised to consult with an experienced Family Law, Special Needs and Estate Planning lawyer to determine the best approach for your particular situation.

A good attorney should also be able to answer questions you may not have even thought to ask, such as whether a trustee can use the trust to pay housing costs for a beneficiary. (Generally, this type of trust fund distribution can result in a reduction of SSI benefits, which can then also spill over to a loss of some Medicaid benefits). Finally, it is also a good idea to review an established trust periodically with your attorney to ensure that everything is still set up and working as intended with regards to any changes to healthcare and estate law, financial situations of the trustee and beneficiaries, as well as taxation.

For more information about Special Needs Trusts, read this excellent resource from the New York Legal Assistance Group: Using a Supplemental Needs Trust to Remain Eligible for Medicaid Benefits

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