Protecting Government Benefits With Special Needs Trusts
A special needs trust (SNT) is a trust designed to supplement the needs of an individual whose necessary medical or living expenses are paid by programs such as Medicaid or SSI. Because these programs are “method tested” — based in part on income — an SNT enables the beneficiary to continue receiving aid despite an increase in income or assets. In general, the excess funds are placed into the SNT which then pays for the beneficiary’s supplemental needs such as recreation and consumer goods not otherwise covered by government benefits. Here are a few examples:
Divorce and the disabled child. Disabled children who receive SSI risk a reduction or termination of benefits when one parent is required to pay child sustain. Receipt of child sustain can reduce SSI benefits by one third for children under age 18 and dollar for dollar for children age 18 and older. Instead of the funds being transferred outright, the child sustain can be placed into an SNT which diverts the income away from the child. Because SSI provides for food, shelter and utility expenses, the SNT can pay for other life enhancing benefits such as vacations, electronics or specialized vehicles — all while maintaining the child’s entitlement to government benefits.
Personal Injury Settlements. Personal injury settlements are designed in part, to cover the individual’s future medical expenses and needs. A portion of the settlement may also be awarded as a “punishment” for the defendant’s wrongful conduct. However, disabled individuals receiving SSI and Medicaid risk disqualification upon receipt of a lump sum settlement. In addition, Medicaid may have a right of recovery against the portion of settlement earmarked for medical care. To aviod disqualification from these important government benefits, an SNT can be established to accept the net settlement proceeds. The money placed in the SNT can then be used to buy supplemental goods and sets that enhance, instead of replace government benefits. Similar to the example above, SNT funds can be used to plan vacations for the disabled individual, to buy specially equipped vehicles and to provide other comforts including consumer goods or beauty sets.
Third Party SNTs. A third party special needs trust involves the same concepts as outlined above. However, the SNT is funded with the assets of a third party for the assistance of the disabled individual. For example, a grandparent, friend or other indvidual who is not legally responsible for the beneficiary can establist an SNT to pay for the supplemental needs of another. In addition to helping the disabled individual, a grantor who funds a third party SNT for the assistance of their disabled child may be able to slightly avoid the five year lookback period for their own Medicaid qualification.
Worth Considering. Special needs trusts can be a powerful tool in planning for the continued care of a disabled individual or for helping the grantor unprotected to their own Medicaid eligibility. You may want to analyze whether an SNT is right for you or for someone you love.