SSI and Medicaid are needs-based programs for individuals with limited resources. To be eligible for these types of programs, an individual must show that they have very little income and less than $2000 in assets. Because of this, outright gifts made to the individual in excess of this amount will disqualify the individual from receiving SSI, Medicaid, or other vital public benefits.
So, instead of giving income and assets directly to a special needs individual, you can give them to a Special Needs Trust with them as the beneficiary. Then, since the beneficiary does not own or have direct access to the trust assets and income, the trust assets will not be counted for the purposes of establishing eligibility for SSI and Medicaid, and can be used to supplement, but not replace, these public benefits.
A Special Needs Trust must be funded with the resources it needs to achieve its goals, this could be cash, stocks, bonds, real estate, life insurance, a lump-sum injury settlement, or an inheritance. Funding the trust means making sure that all the assets that are being set aside for the special needs individual are re-titled in the name of the trust, or name the trust as the beneficiary.
A Special Needs Trust can be funded with either:
- The beneficiary's own assets, which is known as a Self-Settled Special Needs Trust; or
- Assets given by a parent, relative, or other third parties, known as a Third-Party Special Needs Trust.
Self-Settled Special Needs Trust
Federal law requires a Self-Settled Special Needs Trust to reimburse Medicaid when the beneficiary dies, from whatever assets remain in the trust. Also, under federal law, a Self-Settled Special Needs Trust must meet the following requirements:
- The trust must be funded with the beneficiary's assets.
- The beneficiary must be disabled, as defined by the Social Security Act, that is, “unable to engage in any substantial gainful activity as a result of his or her disability.”
- The beneficiary must be under the age of 65 when the Special Needs Trust is established and funded with the beneficiary's assets. For individuals over the age of 65, only a “pooled” Self-Settled trust is available. A Pooled Special Needs Trust is one where the funds of several beneficiaries are pooled together, then managed and invested on behalf of the beneficiaries by a non-profit organization
Third-Party Special Needs Trusts
A Third-party Special Needs Trust is not subject to the Medicaid payback requirement. Any assets remaining in the trust when the beneficiary dies may be distributed in the manner directed by the terms of the trust. Moreover, there is no age limitation or specific disability required for Third Party Special Needs Trust.
- The beneficiary receives financial support without putting their eligibility for needs-based public benefits at risk;
- The trust can be structured to allow others to contribute funds or assets; and
- The trust assets can provide for care services, education, vacations, hobbies, sports, clothing, entertainment, transportation, and other luxuries that public benefits will not pay for, but will enhance the special needs individual’s quality of life.
- A Special Needs Trust can be costly to set up and require high annual fees;
- The trust may be required to pay back Medicaid after the beneficiary dies; and
- The beneficiary lacks independence and discretion with regard to the use of the funds in the trust, which can lead to certain issues in the long run.
A Special Needs Trust can be created during the lifetime of the Grantor, the person creating the trust, or through their Last Will and Testament. Either way, working with an experienced estate planning attorney will help ensure that the trust is structured in a way that meets all the right objectives.
- Choose a Trustee - Usually, the Grantor names him or herself as the trustee. Then another person is named as the successor trustee to take over the trust when the initial trustee dies, becomes incapacitated, or resigns.
- Draft Your Trust - The trustee will be required to comply with the terms of the trust. But without proper documentation of your intent and objectives, your trustee may not be able to understand and comply.
- Sign and Notarize the Document - The trust becomes effective when it is signed and notarized. Unlike a Will, a trust does not need to be signed in front of witnesses. However, it still needs to be signed in front of a licensed notary.
- Open a Trust Account - A trust account is needed to hold the trust assets. After a tax identification number is obtained from the IRS, a trust account can be opened with a minimum deposit.
- Fund the Account - Although practically any type of asset can be held in a trust, cash is what a special needs individual will need to pay for things that SSI and Medicaid will not pay for. Therefore, a Special Needs Trust will generally authorize the trustee to sell tangible assets to raise cash.
Individuals who are disabled and require needs-based public benefits, such as Medicaid or SSI, can benefit the most from a Special Needs Trust. On the other hand, disabled individuals whose coverage of choice is something other than needs-based public benefits, may not benefit as much from a Special Needs Trust, as they are solely intended to be used as a means of maintaining eligibility for needs-based public benefit programs.
To learn more about Special Needs Trusts, speak with an experienced estate planning attorney.