Special Needs Trusts The Basics

Special Needs Trusts

Special Needs Trusts are a great tool for protecting your disabled relatives and ensuring their eligibility for valuable Federal/State Medicaid programs. This article is designed to inform you as to how these trusts are created and administered, and most importantly, to inform you of the benefits provided by these Special Needs Trusts.

Individuals with certain disabilities can receive federal benefits including money for their support and medical expenses from various Medicaid programs. Medicaid is a system set up by the US government specifically designed to assist low income individuals (this is not to be confused with Medicare, federal health insurance for the elderly). In order to qualify for the various Medicaid programs, individuals must have an income level and resources below certain eligibility thresholds.

For the disabled, problems with Medicaid eligibility often arise when parents or other relatives leave an inheritance to the disabled individual. The assets inherited by the disabled individual very well may preclude them from continued receipt of federal aid. Fortunately, the law allows for these assets to be placed into a trust for the disabled individual while still preserving their eligibility for federal benefits. However, certain terms and restrictions must be included in the trust to ensure that eligibility parameters are met.

Benefits of Special Needs Trusts

Essentially these trusts allow for the assets in trust to be used only for certain needs of the disabled individual. The assets in trust will go toward supplementing government benefits rather than supplanting (replacing) them. The most common restrictions on the special needs trust include provisions which prevent trust assets from being used for food and shelter of the disabled individual. The goal is to let the federal government continue to pay for these primary expenses. Another restriction placed on Special Needs Trusts is that the assets from the Trust must be used only for the benefit of the Special Needs Beneficiary. For example, a family has a family member with special needs who has a qualified Special Needs Trust. The parents wish to use funds from the Special Needs Trust to purchase a house for the family. In order to allow assets or funds to be used from the Special Needs Trust to purchase the house, the special needs individual must live in the house. However, in order to avoid violating the rule that the assets from the Special Needs Trust must be used only for the benefit of the special needs individual, in order for the family to be able to reside in the house with the special needs individual, the family must pay rent to the Special Needs Trust. Also worth noting, if the disabled individual receives SSI in addition to Medicaid, using assets/funds from the Special Needs Trust to pay for housing can, and most likely will, cause a reduction in the SSI benefit the disabled individual receives.

Types of Special Needs Trusts

There are several types of Special Needs Trusts:

Self Settled Trusts – This Trust is set up and funded by the disabled individual using their own assets.

Third Party Trusts – This Trust is set up and funded by a third party who does not have an obligation to provide for the special needs individual.

A 42 U.S.C. 1396 (p)D4a or D4c Trust – This Trust is set up under the rules provided for in 42 U.S.C. 1396 (p)D4a or D4c. Under the provisions of the aforementioned statute, a parent, guardian or the court can set up a Trust for the disabled individual using funds from a party who does have a legal obligation to provide for the special needs individual.

One very important requirement to note about Special Needs Trusts is the payback provision. If the Special Needs Trust is either a Self Settled Trust or a 42 U.S.C. 1396 (p)D4a or D4c Trust, then there is a requirement that Medicaid be listed as the secondary beneficiary. This means that once the special needs individual is no longer able to be a beneficiary of the Trust, due to death or no longer meeting the necessary requirements for a disability, then Medicaid becomes the beneficiary, at least up to the amount of benefits paid by Medicaid for the disabled individual’s medical care.

There are many other requirements vital to setting up a Special Needs Trust. It is important to speak with a Special Needs Planner who is familiar with all of the laws and requirements so that the special needs individual does not inadvertently lose their Medicaid and SSI benefits! If you do not know of a special needs planner, please feel free to call our office and set up a free consultation!

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