Special Needs Trusts

To qualify for Medicaid, an applicant must be determined to be "needy", i.e. be at least 65 or older, or be permanently disabled or blind and show that Medicaid is medically necessary. For 2014, the applicant cannot have income in excess of three times the maximum SSI poverty rate, or $2,163 per month. Certain assets are exempt:

  1. The home with an equity value of not more than $543,000 (as long as the individual has an "intent to return" or if the spouse or dependent relative lives there.)
  2. Household belongings.
  3. Burial account (up to $1,500).
  4. Burial plots.
  5. Pre-paid, non-cancelable burial contracts.
  6. Cash value of life insurance that does not exceed $1,500 face value.
  7. Term-life insurance.
  8. One motor vehicle.
  9. Inaccessible assets.
  10. Pension funds until they are accessible to the applicant.
  11. Certain income-producing property essential to a person's self-support.
  12. Up to $6,000 of the equity value of nonbusiness property used to produce goods and services essential to the individual's self-support.

Proper planning can include changing non-exempt assets into exempt assets and allow you to give substantial assets to someone who is disabled and still allow that person to qualify for Medicaid coverage of medical care and long-term nursing home care.

One way is a Special Needs Trust also called a Supplemental Needs Trust or a Medicaid Trust. These trusts can be used to fund the supplemental needs of a disabled individual while maintaining that individual's eligibility for government benefits. Special Needs Trusts are an exception to the rules that normally apply to trusts and the money put into the trust can only be spent for the care of the trust beneficiary. These trusts can be funded with a disabled individual's own funds (as governed by the Omnibus Budget Reconciliation Act of 1993 [OBRA '93]), but may also be funded with assets from a third party (e.g., a parent or grandparent). Federal and state benefits are generally available to qualifying children and adults who have special needs. If your child qualifies for government benefits, one of your goals may be to ensure that his or her eligibility continues into the future.

There are also some types of special needs trusts that can be established for a parent or other individual over 65 who wants to preserve eligibility for nursing home benefits under Medicaid. A special needs trust restricts the beneficiary's own direct access to the assets in the trust to such an extent that the assets are not considered legally available to the beneficiary, thereby making the person eligible for Medicaid benefits because the assets in the trust are uncountable, or exempt.

Normally, a trust will be considered an available asset whenever someone applies for a means tested public assistance program such as SSI or Medicaid. Unlike a traditional trust, a properly structured and administered special needs trust will not be counted as an available asset by Medicaid or Supplemental Security Income (SSI) when determining the beneficiary's eligibility; and trust disbursements will not be counted as income under the rules that apply to SSI and Medicaid.

If you're thinking about setting up a special needs trust, there are a few other points you should consider including carefully choosing the trustee; providing a letter of intent to describe how you want your child or loved one to be cared for after you're gone; and informing other family members why you're setting up the special needs trust. The Special Needs Trust is administered by someone you name, called the trustee, to oversee the spending of the money. In order for the trust to qualify under Medicaid eligibility rules, decisions about how trust funds are spent have to be made by the trustee, not by the beneficiary. The trustee should be someone you have confidence in, be someone who is willing and able to perform the trustee's duties, and be someone who is likely to be able to perform the job for a long while.

But because SSI benefits are need-based, inheriting money can mean that a child with special needs will lose his or her eligibility for this benefit program. By naming a special needs trust as your beneficiary instead of your child, however, assets can be devoted to the care of your loved one. In addition, since SSI recipients are normally automatically eligible for Medicaid benefits, preserving your child's eligibility for SSI may preserve his or her eligibility for Medicaid as well.

Although Medicaid pays for a number of medical costs, including hospital bills, physician services, and long-term care, it will not subsidize items and services considered nonessential (i.e. expenses such as eyeglasses, dental care, rehabilitation services, home health aide services, as well as personal expenses such as transportation or computer equipment). To ensure that trust assets are unavailable to the disabled beneficiary, the trustee must have sole discretion over the distribution of trust income and principal. The beneficiary must have no control over the trust and no right to demand distributions from the trust. The trustee should purchase goods and services directly on the beneficiary's behalf, instead of giving the beneficiary money from the trust to purchase items needed.

If the trust is intended to supplement, rather than replace, government benefits, it must be properly drafted. Although requirements vary according to state law and the type of special needs trust being established, here are some of the rules that apply to special needs trusts in general:

  • Generally, only a parent, grandparent, legal guardian, or court can set up a special needs trust. The disabled person, no matter how competent, cannot be the "creator" of the trust (even if the trust is funded by his or her personal assets).
  • The beneficiary cannot revoke the trust.
  • The individual with special needs must be considered "permanently and totally disabled" under SSI criteria.
  • Under the terms of the trust, the trustee may not be permitted to make payments or distributions that might interfere with government benefit eligibility (e.g., distributions cannot be made directly to the beneficiary).

Special needs trusts may be established as part of a Will (known as a testamentary trust) or during the creator's lifetime (known as a living or inter vivos trust). Special needs trusts can hold an unlimited amount of funds and can be added to at any time.

Although there are many types of special needs trusts, they fall into two general categories:

  • The third-party special needs trust (funded with assets belonging to someone other than the beneficiary); and
  • The self-settled trust (funded with assets belonging to the beneficiary).

The third-party special needs trust is established with funds that belong to someone other than the disabled beneficiary. For instance, a parent or grandparent may create such a trust under a Will and fund it with a gift of cash, life insurance, or another asset. Upon the death of the disabled individual, any assets that remain in the trust can be distributed to whomever has been designated; if the third-party trust is properly drafted, the state will not have to be "paid back" for long-term care services when the disabled individual dies. Although life insurance is one of the most popular funding methods (in particular, lower-cost survivorship life insurance), each method has advantages and disadvantages. To ensure that the trust is adequately funded, you'll need to estimate how much income your child is likely to need over the course of his or her lifetime.

A self-settled special needs trust is established with funds owned by the disabled person. For instance, a self-settled trust might be established using a personal injury award or inheritance. One type of self-settled trust is the qualified self-funded special needs trust. This kind of trust is created for the sole benefit of a disabled individual who is under age 65 at the time the trust is established. Upon the beneficiary's death, Medicaid must be "paid back" from the trust assets for any long-term care provided. This type of trust is also known as a (d)(4)(A) trust.

Another common type of self-settled trust is the qualified pooled trust, also known as a (d)(4)(C) trust. This kind of trust is established and managed by a nonprofit organization. Separate accounts are maintained for each trust beneficiary, but funds are pooled for investment and management purposes. Upon the beneficiary's death, the nonprofit organization receives assets remaining in the trust, and will reimburse Medicaid for benefits paid to the beneficiary. In some cases, surviving family members may be entitled to receive some or all of the remaining funds. Self-settled trusts are complex and must comply with the requirements of OBRA '93 that govern them.

A parent can preserve his or her own eligibility for nursing home benefits under Medicaid by transferring his or her funds into a special needs trust established to benefit a disabled child, as long as the trust has a Medicaid payback provision.

A Special Needs Trust can be set up as part of your Will or as part of a living trust. Or, the trust can be set up to go into effect while you are alive. There may be tax and probate reasons for doing so one way or the other.

Special needs planning is complex and technical, and the laws that govern special needs trusts differ from state to state. Also keep in mind that each situation is different and there may be other ways to protect your assets that do not involve a special needs trust. To properly plan for your child's or loved one's future, work with a qualified attorney or financial professional who has experience with the planning needs of families of disabled individuals. This person should also have a thorough understanding of the income, gift, and estate tax consequences that must be considered when funding and administering a special needs trust.