Special Needs Trusts (also known as a Supplemental Needs Trusts) are created for various reasons. Examples are: a parent creates a trust to provide for a disabled child’s long-term needs; a trust is created to deposit proceeds from a personal injury settlement; or a trust is created for a person with significant assets who becomes disabled and wants to qualify for needs-based government benefits without having to first “spend” down assets. A person can lose their Supplemental Social Security (SSI) and possibly Medicaid if they possess more than $2,000 (this number varies from state to state) in assets. Hence, a Special Needs Trust is a way for a person with a disability to receive financial support while remaining eligible for SSI and Medicaid.
Money from a Special Needs Trust cannot be used to pay for food or shelter (because SSI pays for these items). However, the funds from a Special Needs Trust can be used for anything not already covered by SSI or Medicaid. The funds from a Special Needs Trust can be used to pay for furniture, a computer, education, equipment, transportation, entertainment, travel, out-of-pocket medical and personal care expenses, etc.
There are two types of Special Needs Trusts – Self-Settled and Third-Party Settled. The main difference between the two types of trusts is whose assets fund the trust. A Self-Settled Special Needs Trust is funded with the assets of the person with a disability (if under age 65) while a Third-Party Settled Special Needs Trust is funded with the assets of someone other than the person with a disability.
Self-Settled Special Needs Trusts are established by the beneficiary (person with a disability) or someone acting on their behalf with the beneficiary’s funds for the purpose of retaining or obtaining eligibility for public benefits. A Self-Settled Trust contains a “payback” provision which means that any money left in the trust at death must be used to “reimburse” the state for medical benefits (Medicaid) before the leftover money is passed on to heirs. Payments made from this type of trust may be more restrictive than those from a Third-Party Settled Special Needs Trust. No cash payments should be made to the beneficiary.
Third-Party Settled Special Needs Trusts are established by a person other than the person with a disability (beneficiary) with assets that do not belong to the beneficiary. These trusts are often used for a family inheritance to a person with a disability. They should be set up beforehand by the family member or created through their will. Third-Party Settled Special Needs Trusts do not have a “payback” provision for Medicaid benefits. The kinds of payments the trust can make are usually more generous and flexible than a self-settled trust. No cash payments should be made to the beneficiary.
These trusts can be complicated and should be drafted by a knowledgeable attorney who specialized in trusts for individuals with a disability to ensure that the trust follows the SSI and Medicaid rules.