Protecting Your Loved One With A Special Needs Trust

A special needs trust can be established for the benefit of a disabled person to provide supplemental financial support while preserving eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI). In order to qualify for these government benefits, an individual cannot have resources that exceed a certain threshold, which is often as low as $2000. Funds in a special needs trust do not count toward the resource limit. In contrast, an inheritance left outright to a disabled beneficiary, e.g., by beneficiary designation, by will, or by dying without a will, can adversely impact that beneficiary’s eligibility for government benefits.

There are three main types of special needs trusts—first-party, third-party, and pooled trusts. First party trusts are funded by the beneficiary’s assets, e.g., legal settlement proceeds, while third party trusts are funded by the assets of others. Pooled trusts are managed by nonprofits. With pooled trusts, each beneficiary has a separate established account, but the accounts are “pooled” together for the purpose of trust management and investment.

• Payback Provision: The most significant provision in a first-party special needs trust is the payback provision, which stipulates that upon the beneficiary’s passing, any funds remaining in the trust must be used to reimburse the state for Medicaid benefits paid during the beneficiary’s lifetime.
• Discretion of Trustee: The trustee has full discretion to use trust assets to enhance the beneficiary’s quality of life, including covering expenses related to education, recreation, travel, and other non-essential items, without concern for government benefit eligibility.
• Limitations on Distributions: These trusts come with limitations on the use of trust assets, which can only be used for supplemental needs that are not covered by Medicaid or other government benefits.
• In Pennsylvania, this type of trust is created under 42 U.S.C. §1396p(d)(4)(A). The Department of Human Services (DHS) must approve of this trust. Social Security must receive a copy of this trust, and while they do not approve it, they can deny benefits if the trust is not compliant.

• No Payback: There is no payback to the state with this type of trust.
• Successor Beneficiaries: A third-party trust can be structured to benefit not only the primary beneficiary with special needs but also other family members or charities as successor beneficiaries. This provides flexibility in wealth distribution while ensuring that the special needs beneficiary’s needs are met.
• Discretion of Trustee: The trustee has full discretion to use trust assets to enhance the beneficiary’s quality of life, including covering expenses related to education, recreation, travel, and other non-essential items, without concern for government benefit eligibility.
• Limitations on Distributions: These trusts come with limitations on the use of trust assets, which can only be used for supplemental needs that are not covered by Medicaid or other government benefits.
• DHS need not approve this type of trust, but it must be disclosed on applications for Social Security and Medical Assistance, and a copy must be provided to these agencies.

Special needs trust funds can be used to pay for a wide range of non-essential items, including but not limited to:

• Clothing;
• Transportation;
• Computer/electronics;
• Training and education;
• Entertainment;
• Vacation;
• Vehicle;
• House;
• Sporting goods and exercise equipment; and
• Telephone, internet, and other leisure utilities such as streaming services.

Special needs trust funds can be used to pay for anything that is not an essential life good (food, water, electricity, rent, gas, mortgage, property taxes, etc.). If trust funds are used to pay for any of these essential items, the Social Security Administration will treat those payments as “in-kind support and maintenance” (ISM), which will be counted against the beneficiary in calculating their SSI award and eligibility for other programs.

Additionally, special needs trust funds are tax-deductible, and are not available to creditors or attachable for paying judgments because the trust assets are technically owned by the trust and not by the settlor or the beneficiary.

While Special needs trusts can be incredibly beneficial in providing supplemental income to individuals with special needs, these trusts do have certain limitations. First, there are costs to manage the trust, and some financial institutions will not agree to manage trusts with less than $1 million in assets. Another disadvantage is that because the funds belong to the trust, not to the beneficiary, the beneficiary does not have the right to pull out funds and use them as they see fit. Instead, the beneficiary must request funds from the trustee, who will then evaluate whether the request is appropriate and serves the purpose of the trust. Lastly, as discussed above, first-party Special needs trusts can also trigger a Medicaid payback. When the trust ends, either because the beneficiary dies or the trust is legally terminated, Medicaid may demand payback for amounts used to provide care for the beneficiary.

Ultimately, whether a special needs trust is right for you and/or your loved one depends upon your circumstances, your needs, and your desires. An attorney familiar with special needs trusts can help you determine whether an one is optimal for your situation.