The Basics of Supplemental Needs Trusts: Maintaining Government Need-Based Benefits
By: Ellen C. Ray, Associate
A Supplemental Needs Trust, often called a “Special Needs Trust,” is an estate planning tool which can be utilized to hold assets for children or loved ones with disabilities to ensure that they continue to receive their need-based government benefits. When an individual receives government benefits such as Medicaid and/or Social Security Income, there are specific requirements as to the countable assets which the individual can have in his or her name. An inheritance or settlement could jeopardize that. To ensure a person maintains eligibility, a Supplemental Needs Trust may be useful. There are three main categories of Supplemental Needs Trusts:
1. First Party Supplemental Needs Trusts
A First Party Supplemental Needs Trust is used when the assets are owned by an individual with a disability. For example, when a child or disabled individual receives a personal injury judgement or settlement, or even an inheritance from an Estate, the funds cannot be held in his or her own name or there is a risk of losing access to government benefits. The First Party Supplemental Needs Trust was created by federal statute in 1994 and is codified in 42 U.S.C. § 1396p(d)(4)(A). There are strict requirements for First Party Trusts to ensure they comply with the statute. These requirements include that the beneficiary be under the age of 65, and the trust be established by a parent, guardian, or the court. The trust must be irrevocable, meaning it cannot be changed, and must be used for the sole benefit of the disabled beneficiary during his or her lifetime. Distributions can only be made on a discretionary basis by the Trustee and the beneficiary cannot have direct control of the assets. At the beneficiary’s death, there is a required Medicaid payback provision, which ensures that Medicaid is repaid to the extent possible for benefits provided during the lifetime of the beneficiary.
2. Third Party Supplemental Needs Trusts
A Third Party Supplemental Needs Trust is used when the assets are owned by another person and are intended to be used for the benefit of a person with a disability. In order to maintain eligibility for benefits, the beneficiary cannot be his or her own Trustee and cannot be entitled to principal or income. Instead, as with the First Party Trust, the Trustee may make only discretionary distributions. There is no age requirement for a Third Party Trust, nor is there a Medicaid payback provision. This Trust can be a good option to incorporate into your estate plan if you know one of your beneficiaries receives, and will need to maintain, government benefits.
3. Pooled Supplemental Needs Trusts
When a person is age 65 or older and receives assets in his or her individual name, a First Party Trust cannot be used. However, it is still important that the individual continue to maintain their government benefits, while also being able to benefit from the funds inherited or received. In these instances, there are a number of nonprofit organizations which run pooled trusts whereby the organization serves as Trustee and can manage the funds for the benefit of the disabled individual. Similar to the First Party Trust the Pooled Trust also has a Medicaid payback provision in addition to fees owed to the nonprofit serving as Trustee. Those vary between organizations.
If you are interested in creating any of these trusts for your child or loved one with a disability or you believe your own estate plan could benefit from the addition of the protections of such a trust, our estate planning department can help you achieve these goals.