Protecting Government Benefits with Special Needs Trusts
A special needs trust (SNT) is a trust designed to supplement the needs of a person whose necessary medical or support expenses are paid through programs such as Medicaid or SSI. Because these programs are “means-tested,” based in part on income, an SNT allows the beneficiary to continue receiving aid despite an increase in income or assets. In general, the leftover funds are placed in the SNT, which then pays the beneficiary’s expenses. additional necessities such as recreation and consumer goods that would not otherwise be covered by government benefits. Here are some examples:
Divorce and the disabled child. Disabled children receiving SSI are at risk of a reduction or termination of benefits when a parent must pay child support. Receiving child support can reduce SSI benefits by a third for children under the age of 18 and dollar for dollar for children over the age of 18. Instead of funds being transferred directly, child support can be placed in an SNT that diverts the child’s income. Because SSI covers food, housing, and utility costs, the SNT can pay other life-enhancing benefits such as vacations, electronics, or specialized vehicles, all while maintaining the child’s right to government benefits.
Personal Injury Settlements. Personal injury settlements are designed in part to cover an individual’s future medical expenses and needs. A portion of the settlement may also be awarded as “punishment” for the defendant’s wrongful conduct. However, disabled people who receive SSI and Medicaid are at risk of being disqualified by receiving a lump sum settlement. In addition, Medicaid may be entitled to recover the health care portion of the settlement. To avoid disqualification from these important government benefits, an SNT can be established to accept the net proceeds of the settlement. Money placed in the SNT can be used to purchase complementary goods and services that enhance, rather than replace, government benefits. Similar to the example above, SNT funds can be used to plan vacations for the disabled person, purchase specially equipped vehicles, and provide other amenities, including consumer goods or beauty services.
Third party SNTs. A third party special needs trust involves the same concepts as described above. However, the SNT is financed with the assets of a third for the benefit of the disabled person. For example, a grandparent, friend, or other person who is not legally responsible for the beneficiary may establish an SNT to pay for the supplemental needs of another. In addition to helping the disabled person, a grantor who funds a third-party SNT for the benefit of his or her disabled child may partially avoid the five-year lookback period for his or her own Medicaid qualification.
worth considering. Special needs trusts can be a powerful tool in planning for the continued care of a disabled person or in helping the grantor achieve his or her own Medicaid eligibility. You may want to explore whether an SNT is right for you or someone you love.