Special Needs Trusts

Special needs trusts are designed to allow a disabled person to receive gifts, inheritances and proceeds of law suits without losing eligibility for state and federal public benefits such as Supplemental Security Income (SSI) and Medicaid.  Under Federal law, assets in excess of $2,000 disqualify a disabled person from receiving needs-based public assistance.  The trust must be constructed correctly so that the assets of the trust do not belong to the disabled beneficiary.

Many needs-based public assistance programs provide a subsistence level of support, and a special needs trust can be used to supplement benefits to address quality of life issues.  A special needs trust can pay for recreation, transportation, training and education and medical care beyond the basics.  A special needs trust should not pay for regular, basic support such as food or shelter, as the funds are considered income to the disabled beneficiary.  SSI benefits are reduced if the beneficiary receives any direct income.

There are three different types of special needs trusts:

  • A parent or other family member can create the special needs trust, and it is considered to be a “third-party trust”.  Wills can also be drafted to create a testamentary special needs trust, as a means of leaving an inheritance to a disable beneficiary.  It is important to have a provision that passes the assets of the trust to another beneficiary after the death of the disabled beneficiary, so that the funds are not used to reimburse Medicaid.
  • A disabled beneficiary under the age of 65 can create a “first party” or self-settled special needs trust, also known as a (d)(4)(A) or “payback trust”.  The trust must specify that any funds remaining in the trust will be paid to Medicaid for the support it provided.  These trusts can also be created by parent, grandparents or a court.  Frequently (d)(4)(A) trusts are created to manage the proceeds of a personal injury or medical malpractice award.
  • A disabled person of any age can participate in a “pooled trust” arrangement by creating, or being a beneficiary of a (d)(4)(C) trust.  A designated non-profit organization pools the assets of multiple disabled beneficiaries, and retains the assets after the beneficiary’s death for the benefit of other disabled beneficiaries.  As a result, generally the state is not repaid for Medicaid assistance provided to the beneficiary.  There are limiting rules that can penalize a disabled person over the age of 65 who contributes assets to a pooled trust.

Once a special needs trust has been created, it must be funded.  Life insurance can be an effective asset for a parent who is planning for the care a disabled child will receive after the parent’s death.  Informing friends and relatives of the existance of the trust allows them to make gifts or bequests to the trust.