Benefits Of A Special Needs Trust Keep Medicaid and SSI

The Purpose of the Special Needs Trust is to protect its beneficiary from losing government benefits such as Medicaid and SSI. A Supplemental Needs Trust, (also known as Special Needs Trust) enables the disabled or sick person to have substantial assets and still receive Medicaid and SSI. In conjunction with other Medicaid and SSI planning strategies, a Special Needs Trust is paramount to protecting assets from being counted for the purposes of Medicaid, SSI, vocational rehabilitation, subsidized housing, and other benefits based upon financial need.

Supplemental Needs Trusts are completely legitimate, being authorized by New York State and Federal Law. The Omnibus Budget Reconciliation Act passed by Congress in 1993 specifically authorized the use of Supplemental Needs Trusts for the benefit of individuals who are under the age of 65 years and disabled according to Social Security standards. The Social Security Operations Manual (POMS) authorizes Supplemental Needs Trusts for non-countable assets.

Special Needs Trust is Also a Valuable Estate Planning and Investment Tool

Many parents also use the Supplemental Needs Trust as a tool to leave assets to their child after their death. A Supplemental Needs Trust can be used to transfer benefits to a disabled person, as well as to shield the disabled person’s own assets, such as inheritance from someone else, proceeds of a lawsuit, insurance proceeds, even lottery winnings. A Supplemental Needs Trust used to protect one’s own assets is called a self-settled trust.

It is important to note that self-settled trusts have to follow specific rules to qualify its holder for government benefits. For example, a self-settled trust cannot be self-created.

Special Needs Trust Provides Protection from Creditors

Because a Special Needs Trust is not revocable, assets in such trusts are not easily reachable by future creditors, and are hard for the courts to reach if there is ever a judgment against the disabled beneficiary

Most Assets in a Supplemental Needs Trust are Not Subject to Repayment

Assets contributed to a Supplemental Needs Trust by parents or third parties are not subject to repayment to the government. The same goes for proceeds of personal injury settlements that are court-ordered into the Trust. In most cases, only assets that at some point belonged to the disabled person can be taken back by Medicaid, and even that occurs only after the death of the disabled individual.

Call the Law Offices of Albert Goodwin at (212) 233-1233 and schedule a consultation to discuss if a Special Needs Trust is right for your situation.

How Special Needs Trusts Interact with Government Benefits

The fundamental design principle of a Special Needs Trust is to "supplement, not supplant" the public benefits the beneficiary receives. Distributions from the trust are meant to provide for needs that the benefit programs do not cover. The classification of distributions matters significantly for benefits eligibility.

SSI implications. Supplemental Security Income has both a resource test and an income test. Assets held in a properly drafted SNT do not count against the resource test. Distributions from the trust can affect SSI depending on what they are paid for:

• Direct cash distributions to the beneficiary are income to the beneficiary and reduce SSI dollar-for-dollar.
• Distributions for food and shelter (called in-kind support and maintenance, or ISM) reduce SSI by up to one-third of the federal benefit rate.
• Distributions for non-food, non-shelter expenses generally do not affect SSI.

This is why trustees of SNTs typically pay vendors directly for non-food, non-shelter items rather than giving cash to the beneficiary. The trustee buys clothing, electronics, vacation experiences, or recreational items directly, ensuring the trust money does not flow through the beneficiary's hands in a way that counts as income.

Medicaid implications. Medicaid eligibility (for non-MAGI categories like the elderly, blind, and disabled) is tied to similar resource and income standards. Assets in an SNT are not counted as resources. Distributions for medical needs that Medicaid would otherwise cover should be coordinated with Medicaid to avoid coverage gaps.

What Trustees Can and Cannot Pay For

The trustee's distribution decisions are guided by the beneficiary's needs and the requirement to preserve benefits. Items typically appropriate for SNT distribution include:

• Education — tuition, books, tutors, training programs.
• Therapies not covered by insurance — additional physical therapy, occupational therapy, speech therapy, behavioral therapy.
• Recreation and entertainment — movies, concerts, sporting events, hobbies, vacations.
• Technology — computers, tablets, smartphones, communication devices.
• Personal services — companion care, additional aide hours beyond Medicaid coverage, professional services.
• Transportation — accessible vehicles, taxis, ride services.
• Furniture and household items.
• Personal items not covered by benefits — premium clothing, books, art supplies.
• Insurance premiums.
• Funeral and burial pre-payment (within program limits).

Items the trustee should avoid or minimize include:

• Cash distributions directly to the beneficiary.
• Payment for food and shelter for SSI beneficiaries (because of the ISM reduction).
• Items that primarily benefit someone other than the trust beneficiary.

The Difference Between First-Party and Third-Party Trusts

Two structurally different types of SNTs exist:

Third-party trusts are funded with assets that never belonged to the disabled beneficiary — typically parents, grandparents, or other family members making gifts or bequests for the disabled person's benefit. There is no Medicaid payback at the beneficiary's death; the remainder passes to other beneficiaries the grantor designated. This is the structure used in most parental planning for a disabled child.

First-party trusts (self-settled trusts) are funded with the disabled beneficiary's own assets — usually a personal injury settlement, an inheritance the beneficiary received directly, or back Social Security payments. Federal law (42 U.S.C. § 1396p(d)(4)) authorizes two main types of first-party SNTs: the (d)(4)(A) trust for individuals under 65 established by a parent, grandparent, guardian, or the individual themselves; and the (d)(4)(C) pooled trust operated by a nonprofit organization and available for individuals of any age.

First-party trusts carry a Medicaid payback requirement: at the beneficiary's death, any assets remaining in the trust are subject to repayment of Medicaid benefits paid during the beneficiary's lifetime, up to the value of the trust. Third-party trusts have no such requirement.

The "Sole Benefit" Requirement

SNTs must be administered for the sole benefit of the disabled beneficiary. The trustee cannot use trust funds to support other family members or to pay obligations that are not the beneficiary's responsibility. This rule has nuance — the trustee can pay for a vacation that includes family members accompanying the beneficiary, for example, because the beneficiary benefits from having family along. But the trust cannot become a general support fund for the family.

Distributions that appear to benefit others raise questions for benefits agencies and can trigger reviews. A trustee who distributes broadly for the family can find the SNT being recharacterized as an available resource for the beneficiary, defeating the whole planning purpose.

Funding the Special Needs Trust

Funding strategies for third-party SNTs typically include:

• Life insurance designated to the trust as beneficiary — affordable for younger parents and provides substantial assets at death.
• Retirement account beneficiary designation to the trust — though this requires care because of required distribution rules.
• Direct funding during life with assets the parents can spare.
• Bequests through the parents' wills.
• Contributions from grandparents and other relatives during their lifetimes or through their wills.

The earlier the trust is funded, the more time the funds have to grow and the more secure the planning. We help families set up the trust early and identify the right combination of funding mechanisms.

Ongoing Administration

An SNT is a long-term commitment. The trustee will be making distribution decisions for years or decades. Ongoing administration includes:

• Monthly or quarterly review of the beneficiary's needs.
• Coordination with the beneficiary's case workers, family, and care providers.
• Maintaining records of all distributions, including the purpose of each.
• Filing annual federal and state tax returns for the trust.
• Periodic review of the beneficiary's benefit status to ensure distributions are not affecting eligibility.
• Adjusting distributions as the beneficiary's needs evolve.

This ongoing work is why trustee selection matters so much. The right trustee — whether a family member with proper guidance, a professional fiduciary, or a pooled trust nonprofit — makes the difference between a trust that serves the beneficiary well over the long term and one that drifts away from its purpose.