I have spoken to many clients and potential clients who simply do not understand what as Special or Supplemental Needs Trust is. These trusts are useful asset preservation and Medicaid planning tools.

Special or Supplemental Needs Trusts are a subsection of trusts, created under the strict rules of the Social Security Administration (“SSA”) and applicable state laws. Among other things, these trusts allow disabled recipients of Supplemental Security Income benefits and Medicaid recipients to continue receiving these important, means-tested government benefits while enjoying additional comforts of life that these trusts can provide.

In order to qualify for disability benefits and/or Medicaid, the applicants’ income and assets must fall within the guidelines established by SSA and the state-run Medicaid program. Sometimes the applicants even “spend down” their assets because that enables them to apply for benefits. However, what frequently happens to benefit recipients is any of the following scenarios: receiving a substantial gift of money or property, receiving a personal injury settlement or judgment, receiving an inheritance, or receiving life insurance proceeds. When that happens, the government will take away or reduce the benefits, or calculate a penalty period during which former beneficiaries will not be eligible to receive benefits unless proper steps are promptly taken to preserve eligibility. Sometimes the steps should be taken long in advance, by the people planning to leave money to beneficiaries. Not surprisingly, such news is devastating to the disabled beneficiaries: they are about to receive some money, only to realize that they are going to lose their benefits.

This is where Special or Supplemental Needs Trusts come in. These trusts allow a disabled beneficiary to place the money into a trust for their sole benefit, and enjoy the benefits this money can bring without jeopardizing their benefits. The trusts must be created properly and approved by the Department of Social Services, but provided the necessary steps are followed, the beneficiaries of government benefits will have a new source of money that is not considered an asset or income for benefit eligibility purposes, but will pay for their supplemental needs (hence the name of the trust), such as travel, entertainment, education, hobbies, and companionship. The trust must not pay for necessities such as food, housing and medical care paid for by SSI and Medicaid because that will cause a reduction in benefits, but most of the “extras” that will enhance the beneficiaries’ quality of life are allowed.

Of course, there are important restrictions on how the money is paid, to whom, for what, and even up to what amount every year. For example, money should not be paid directly to the beneficiary by the trustee because that money may be considered “income” and cause a corresponding reduction in benefits. The money should be paid directly to vendors who provide services and goods to the beneficiaries. There are also important money management, reporting, investment, accounting and taxation issues the trustee must handle. Therefore, it is very important to select a knowledgeable trustee who will manage the funds and handle the administration and payments. Depending on the circumstances, selecting a professional trustee such as an attorney or a bank may be a prudent move. For some trusts, a non-profit organization may be the trustee.

Many important distinctions and limitations exist based on the age of the disabled individual and on whether the trust is created with the beneficiary’s own assets or someone else’s assets. Under age 65, more options are available, but even after 65, there are ways to protect and use the money and keep the eligibility for government benefits.

Other options are available based on the particular circumstances of the beneficiaries: marital situation, children, etc., so you should speak to a knowledgeable attorney about your options if you are a recipient of SSI and/or Medicaid and you expect to receive an inheritance or settlement. The attorney will explain the options available to you, as well as the difference between “pay-back” and pooled trusts, and many other important distinctions.

These trusts are good not only for receiving inheritances and personal injury settlements. These trusts also allow third parties (spouses, parents, grandparents or legal guardians) to transfer money and property to children with special needs or to disabled individuals under 65, while allowing these beneficiaries to still qualify for Supplemental Security Income and Medicaid. If property structured under Social Security laws, these trusts will allow the beneficiaries to enjoy a better quality of life in addition to receiving government benefits. These trusts can supplement the government benefits by providing for beneficiaries’ recreation and entertainment, transportation, and trips, while the government benefits provide for basic necessities such as housing, food, and clothing. There are important limitations, advantages and managing options depending on who sets up the trusts, when and how, so you should speak to an attorney who will explain the differences. These include tax issues, whether creditors of the beneficiary or settlor can reach the trust, and whether the funds in the trust will have to be used to pay the government back for the care of the disabled individuals. A settlor other than the beneficiary can transfer money to such trusts without a penalty for the settlor’s own Medicaid eligibility!

Special or Supplemental Needs Trusts can also be used to reduce or eliminate “spend downs” to qualify for benefits. Furthermore, the trusts may own a home where the beneficiary may live, and pay for improvements to the home or renovations. However, to illustrate the importance of understanding and following proper guidelines: payment for utilities would be considered income and cause a reduction in SSI benefits.

CategoryEstate Planning

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