Legal
How Special Needs Trusts Work
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A Supplemental Benefits Trust, also called a Special Needs Trust, is used for a disabled individual who receives or may receive need-based government benefits, such as SSI or Medicaid. They are not necessary for a person receiving benefits which are not based on need, such as SSDI. When a disabled person qualifies for Medicaid or SSI benefits based on need, receipt of funds from an inheritance or a personal injury settlement will automatically disqualify him from receipt of further government benefits until those funds are spent. As a result, the inherited funds or the personal injury settlement are spent on the disabled person’s medical care which otherwise would have been paid by Medicaid or SSI.
SSI and Medicaid benefits are based on the applicant’s total assets and income. The eligibility rules are very state specific, so it is important to be aware that rules change from state to state. In order to preserve a disabled person’s eligibility for needs-based benefits while still receiving a personal injury settlement, the person, or the person’s parent, grandparent, guardian, or a Court must create a Special Needs Trust. The funds may then be deposited in the Trust and used for the disabled person’s benefit without the loss of eligibility for government benefits.
The typical Special Needs Trust gives the Trustee absolute discretion to make or withhold distributions for the special needs beneficiary as long as they are not used for food, shelter or support, because the public benefits are intended to provide for these needs. The beneficiary’s total lack of control means that neither the assets nor the income of the Trust are treated as “owned” by the special needs beneficiary, and are, therefore, not counted as income or “resources” for purposes of determining eligibility for Medicaid and SSI. As a result, Medicaid will pay medical expenses, and SSI will pay an amount for basic living costs, while the assets in the Special Needs Trust can be used to enhance the quality of life for the beneficiary. Examples of supplemental benefits that the Trust may provide:
• Wheelchair-accessible van;
• Therapy equipment not covered by Medicaid, such as a swimming pool;
• Entertainment - stereo equipment, computer;
• Recreational needs, including vacations;
• Transportation for the beneficiary to visit relatives or vacation;
• Costs of a companion to accompany the beneficiary, if needed for the beneficiary’s assistance.
This list is not exclusive, and there are many more supplemental benefits which would be available to the beneficiary through a Special Needs Trust. A Special Needs Trust created for receipt of funds from a personal injury settlement is based on a specific federal law and must comply with that law in order to be effective. This Trust must provide that all medical assistance costs paid by the state will be reimbursed to the state from funds remaining in the Trust upon the beneficiary’s death. Generally, all of the funds in the Trust will be used for the beneficiary’s benefit during his life, so, in actuality, there will be very few, if any, assets remaining in the Trust upon the beneficiary’s death. In the case of smaller personal injury settlements or inheritances, a “pooled income” Trust, also created by federal law but managed by the state, may be more appropriate.
In the case of an inheritance from a parent or grandparent, upon the death of the special needs beneficiary, the remaining Trust assets are distributed according to the parent or grandparent’s wishes as directed in the Trust and are not used to reimburse the state for medical assistance costs it has paid. However, this Trust must be created in the Will of the parent or grandparent; it cannot be created after the death of the parent or grandparent, so it is important that the parent or grandparent of a special needs individual seek competent legal advice in estate planning.
Victoria J. Hoffman, J.D., CFP, a 1981 graduate of Emory University Law School, maintains a law practice concentrating in advanced estate planning, retirement planning, and asset protection as well as transactional and litigation representation in commercial, business, corporate, franchise and equipment leasing matters. She is a Certified Financial Planner and an arbitrator (inactive) for the NASD.