If someone is disabled, is on public benefits such as Medicaid and SSI, and will be receiving a windfall of some kind, such as the proceeds of a personal injury action or inheritance, he or she may be at risk of becoming ineligible to receive public benefits. That is where a supplemental needs trust, also commonly known as a special needs trust, can come in to play to help disabled individuals maintain their eligibility for public benefits while still allowing the funds that they are due to receive to be used for their benefit. A supplemental needs trust can also be established with a third party’s funds, which are then used for the disabled individual’s benefit.
Distributions from a supplemental needs trust can greatly enhance the trust beneficiary’s quality of life without putting his or her eligibility for public benefits in jeopardy. However, they must be carefully drafted to comply with federal and state guidelines, in order to ensure that the trust beneficiary’s eligibility for public benefits is not negatively affected.
There are two basic types of supplemental needs trusts: first-party supplemental needs trusts and third-party supplemental needs trusts. Both types of trusts are required to be irrevocable, and in each type of trust, the trust beneficiary cannot have the right to direct the distribution of the funds held in the Trust. The trust beneficiary for either type of trust must also meet the Social Security Administration’s definition of disabled.
A first-party supplemental needs trust may only be established for a disabled individual who is under 65 years of age. A first-party supplemental trust may still be used for the benefit of someone over the age of 65, as long it is established prior to the time that the disabled individual turns 65 and is not funded with new property or funds after the disabled individual turns 65.
A first-party supplemental needs trust is funded with assets owned by the trust beneficiary or those to which the beneficiary is legally entitled, commonly amounts from personal injury settlements or inheritances. Beneficiaries who owned property prior to becoming disabled can also utilize a first-party supplemental needs trust to protect that property while still qualifying for public benefits. Payments from the trust can only be used for the sole benefit of the trust beneficiary, and must supplement any public benefits that the trust beneficiary is receiving, rather than supplant or impair any of those public benefits. The trustee of a first-party supplemental needs trust could be a family member, attorney, close friend, or even a bank.
There used to be a requirement that first-party supplemental needs could only be set up by the trust beneficiary’s parent, legal guardian, grandparent, or the courts. In late 2016, after the passage of the Federal Special Needs Trust Fairness Act, the rules changed to allow the trust beneficiary to establish up a first-party supplemental needs trust with their own funds, as long as they are mentally and legally competent to do so (i.e. not a minor, declared incapacitated by a court, etc.). A mentally and legally competent beneficiary may have his or her trust set up without court permission, but anytime that the trust is set up for a minor or legally incompetent beneficiary, a court must authorize the establishment of the trust.
When the beneficiary of a first-party supplemental needs trust dies, the remaining assets in the trust must be used to reimburse the state for the value of the Medicaid benefits administered to the beneficiary during his or her life. Only reasonable trust administration fees and taxes may be paid from the trust prior to that reimbursement. If there are any assets remaining after reimbursement to the state, those funds may be administered according to the terms of the trust document.
The existence of a first-party supplemental needs trust must be disclosed to the trust beneficiary’s Department of Social Services, and the trustee of the trust must provide financial accountings of the trust, usually on a yearly basis, to the Department of Social Services, giving details about each disbursement of the trust.
A third-party supplemental needs trust is funded with the assets of a third party, instead of the assets of the trust beneficiary. Third-party supplemental needs trusts may be formed by the parent of an individual with disabilities, assuming that individual is 21 years of age or older, or it may be formed by another family member or any person other than the trust beneficiary. Third party-supplemental needs trusts may be created under a Last Will and Testament and funded when the donor of the funds passes away, or they may be created and funded during the lifetime of the donor.
Unlike with a first-party supplemental needs trust, when the beneficiary of a third-party supplemental needs trust dies, there is no requirement that the remaining trust assets must be used to reimburse the state for Medicaid benefits administered to the beneficiary, because the assets never belonged to the trust beneficiary in the first place.
Supplemental needs trusts may also be established through pooled trust programs administered by non-profit organizations. Pooled trust programs may take either the form of first-party supplemental needs trusts or third-party supplemental needs trusts, and are not limited to people under 65 years of age.
In pooled trust programs, the non-profit holds a separate sub-account for each trust beneficiary and uses the funds in that sub-account for the sole benefit of the trust beneficiary. However, the non-profit will pool together the assets from each sub-account for investment and management purposes. The funds remaining in a pooled trust when a trust beneficiary passes away must be used for the benefit of other disabled beneficiaries, and do not need to be paid to the state.
With a pooled trust, there is one overriding drafted agreement called a Master Trust, and each beneficiary of the trust signs an agreement to join the pooled trust program. There may be an initial deposit amount requirement for a pooled trust, and the co-trustees will generally charge administrative fees for writing checks from the Trust on behalf of beneficiaries, for account maintenance, tax returns and accountings, investment fees, and so on.
Pooled trusts are sometimes used by older individuals who want to eliminate their Medicaid spenddown, because they can instead send their excess income to the pooled trust, which can then be used to pay for their needs. Any pooled trust beneficiary looking to use the pooled trust for elimination of their spenddown will need to have the Pooled Trust documentation approved by Medicaid.
A supplemental needs trust usually may not be used to pay for day-to-day living expenses such as shelter, food, rent, mortgage payments, garbage removal, and utilities, especially if the trust beneficiary is on SSI, and may only be used for the special needs of the trust beneficiary. All payments must be made to a third party, rather than directly to the trust beneficiary. The trustee of the supplemental needs trust may also reimburse third parties for amounts expended on the beneficiary’s behalf.
If payments are made directly to the trust beneficiary or are made for expenses such as rent and food, they will be considered income for purposes of SSI eligibility. For example, each dollar received by the trust beneficiary will result in a one-dollar reduction in SSI benefits, up to a maximum of one-third of the SSI benefits each month.
The following are examples of what a supplemental needs trust may pay for, without endangering the trust beneficiary’s eligibility for public benefits: