Supplemental Needs Trusts (also known as special needs trusts) are Trusts which allow a beneficiary with a disability to receive inheritances, gifts, lawsuit settlements, or other funds without losing their eligibility for certain government programs, such as Medicaid and Supplemental Security Income (SSI). Supplemental Needs Trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining their eligibility for public benefits.
What are the Different Types of Supplemental Needs Trusts?
There are a few different types of Supplemental Needs Trusts. There are First Party Supplemental Needs Trusts and Third Party Supplemental Needs Trusts. Although a type of First Party Supplemental Needs Trusts, there is a third type of Trust known as a Pooled Income Trust. Each type of vehicle is discussed in turn below.
What are First Party Supplemental Needs Trusts?
First Party Supplemental Needs Trusts are Trusts that are established for the sole benefit of a disabled person, and funded with the assets of the disabled person. If a disabled person is a defendant in a lawsuit and is about to receive settlement funds, or will otherwise receive money outright, they can establish a First Party Supplemental Needs Trust to avoid loss of benefits.
These First Party Trusts will have a special “payback” provision for Medicaid purposes that will allow Medicaid the right to be paid back for expenses incurred on behalf of the disabled individual upon the death or termination of the Trust. For example, if Medicaid spends one million ($1,000,000) on rendering care to a disabled individual who creates this type of Trust, then upon the death of the individual or the termination of the Trust, Medicaid will have the right to be reimbursed based on whatever is left in the Trust. If nothing is left, then Medicaid will get nothing.
Note that there is no payback requirement for SSI, Medicare, Section 8, or SNAP benefits from these types of Trusts.
First Party Trusts can be established by a parent, grandparent, guardian, individual, or Court. The disabled individual must be under 65 years old in order to establish this type of Trust. (A person over the age of 65 may use a Pooled Income Trust). If the disabled individual is over 65, then it will not be possible to create this Trust. To qualify as an individual OBRA ‘93 payback trust, the following conditions must be satisfied:
- The trust is established for the benefit of a disabled person under the age of 65 by the individual, a parent, grandparent, guardian of the disabled person, or a court.
- The trust is funded with the assets of the disabled beneficiary.
- Under the terms of the trust agreement, the state Medicaid agency must be reimbursed, up to the total value of medical assistance provided to the beneficiary, from the remaining balance in the trust upon the death of the beneficiary.
You should be aware of the Social Security Administration requirements for supplemental needs trusts if the Beneficiary with a disability receives or may be eligible for Supplemental Security Income (SSI). The Social Security Administration has imposed a requirement that the person establishing the trust must have “legal authority to act with respect to the assets” of the beneficiary. The result of this policy is that a supplemental needs trust funded with the assets of a disabled beneficiary who receives SSI may have to be established by a court-appointed guardian, even if a parent or grandparent is available to establish the trust.
What Can First Party Supplemental Needs Trusts Money be Used for?
The trust can be used for anything to or for the benefit of the disabled individual, including, but not limited to:
a home, mortgage payments, insurance premiums if required by the mortgage company, real estate taxes, rent, heating fuel, gas, electric, water, sewer, and garbage removal, cable, phone, internet, cleaning services, landscaping, newspaper subscriptions, household furnishings and other personal property, clothes, food, supplies, vacations, car, car insurance travel, pre-paid funeral (while the person is alive), credit card bills, education, medical related equipment or therapies not provided by government benefits, geriatric care management services, and more.
When should I use a First Party Supplemental Needs Trust?
You should use the First Party Supplemental Needs Trust when a disabled individual is going to be the direct recipient of funds (eg: Gift, Inheritance, Lawsuit Settlement) and you want to be able to ensure that the disabled individual will continue to receive government benefits. Lawsuit settlements often consist of a lump-sum payment and an annuity. Both types of payment can be directed to a first-party SNT established by the court.
In addition, if a spouse with special needs is unable to work and qualifies for public benefits, it may be helpful to have a first-party trust incorporated into the divorce settlement. For example, when the settlement calls for the working spouse to pay the non-working spouse both a lump-sum equitable distribution and monthly alimony, both types of payment can be directed to the trust, rather than to the spouse.
What are Third Party Supplemental Needs Trusts?
A Third Party Supplemental Needs Trust is a trust that is funded with another person’s money that can then be used for the benefit of a disabled individual. The best example is an inheritance or a gift. Instead of leaving money to a disabled individual outright in your Will, you can create a special trust inside of your Will so that the money still can be used for the benefit of the disabled individual without counting as their asset. You can name anybody you like to be the trustee of this third party trust. There is no payback provision for third party trusts so any money left over upon the death of the disabled beneficiary can pass how you want.
When should I use a Third Party Supplemental Needs Trust?
You should use a third party Trust whenever you want to leave money to or for the benefit of a disabled individual. I often hear stories of how people did not want to leave money to their disabled child and instead left the money to another person with requests that this money be used to care for the disabled child. This type of bequest is precatory and does not guarantee and insure that the funds are in fact used for the disabled individual. Instead, consider creating a simple third party trust in your Will or a stand alone third party trust so that there can be written instructions for the purpose and intent of that money.
Third Party Supplemental Needs Trust money can be used for all of the same purposes as First Party Trusts described above.
The Third Party Supplemental Needs Trust can be established under a Will or a standalone Trust. We can help you establish First and Third Party Supplemental Needs Trusts. Contact us for more information.
For more information, please contact Estate Litigation, Guardianship, Probate and Estate Planning attorney Regina Kiperman:
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New York, NY 10005
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