Special Needs Trusts

When an individual with a disability receives an inheritance or settlement funds, the first reaction is often fear rather than relief. Many of these individuals rely on valuable public benefits such as Supplemental Security Income and Medicaid to meet basic living needs and healthcare expenses. An influx of funds will jeopardize the individual’s eligibility for these benefits. A special needs trust may be a helpful tool in preserving an inheritance or settlement while maintaining access to public benefits.

What is a Trust?

A trust is a legal document where one party, known as the grantor or settlor, transfers assets to another party, called the trustee, to manage and hold for the benefit of a third party, known as the beneficiary. Think of a trust like a special box where you can put money and valuable things to keep them safe and organized. These are the key roles:

  • Grantor or Settlor: The person who puts their money and valuable things into the box. This person sets up the box and decides what goes into it. They also decide the rules for the box.
  • Trustee: The person who takes care of the box and makes sure everything inside is used properly and according to the rules. The trustee decides how and when to use the money in the box.
  • Beneficiary: The person who gets to benefit from the box. The trustee uses the money in the box to buy goods and services for the beneficiary.

What is a Special Needs Trust?

A special needs trust is a trust that is customized specifically for an individual with a disability. It is designed so that the individual can keep the funds as a resource to improve quality of life while maintaining eligibility for public benefits.

When an individual with a disability receives significant funds, they may decide to transfer those funds to a special needs trust. This type of special needs trust is called a “first-party,” “self-settled,” or “(d)(4)(A)” trust. This is different from a “third-party” trust, which is typically created by a parent for a child with a disability.

What are the Key Features of a First-Party Special Needs Trust?

  1. Beneficiary’s Own Assets: The trust is funded with the beneficiary’s own assets which may come from an inheritance or personal injury settlement.
  2. Age Requirement: The beneficiary must be under age 65 at the time the trust is established and funded.
  3. Irrevocable: The trust cannot be revoked or amended by the beneficiary.
  4. Sole Benefit: The trust assets can only be used for the beneficiary during his or her lifetime.
  5. Medicaid Payback Provision: Upon the death of the beneficiary, any remaining assets must be first used to repay the state for Medicaid benefits provided to the beneficiary.

How Does a First-Party Special Needs Trust Work?

When assets are transferred to a first-party special needs trust, they are no longer considered countable resources for determining eligibility for public benefits. This means that the beneficiary can continue to receive vital government assistance while using the trust assets for expenses not covered by these programs.

The trustee has discretion to use the trust funds for a variety of purposes that enhance the beneficiary’s quality of life. Instead of distributing trust funds to the beneficiary, the trustee pays directly for the goods and services. This can include:

  • Food and clothing
  • Transportation
  • Personal support services or caregivers
  • Medical and dental care not covered by Medicaid
  • Special therapies and treatments
  • Assistive technology and adaptive equipment
  • Education and training
  • Recreation, entertainment, and travel
  • Financial or legal services

The trustee may also pay for shelter expenses such as rent or mortgage, property taxes, and utilities. However, when a special needs trust pays for shelter expenses for an individual receiving Supplemental Security Income (SSI), these payments will result in a reduced benefit payment. Therefore, the trustee must carefully consider these types of payments and the consequences on benefit amount and eligibility. A special needs planning attorney can help identify the best method for utilizing trust resources while maximizing access to public benefits.