If you want to provide for a loved one with a disability or special needs after your death, care must be taken to ensure that the inheritance helps rather than harms your loved one.
An inheritance received outright could affect eligibility for government benefits the individual currently receives or may need in the future. In this situation, a supplemental needs trust may be beneficial.
What Is a Supplemental Needs Trust?
A supplemental needs trust, also called a special needs trust or SNT, is designed to hold money or property for a person with a disability. When properly created and administered, the trust can supplement the beneficiary’s public benefits without making its assets directly available to the beneficiary.
Programs such as Supplemental Security Income and Medicaid are means-tested. To qualify, an individual must meet the program’s financial eligibility requirements.
An outright inheritance may cause a beneficiary to exceed the applicable income or resource limits. This could make the person ineligible for benefits or require the assets to be spent before eligibility can be restored.
A properly drafted supplemental needs trust may allow you to provide for your loved one while preserving current benefits or leaving open the possibility of qualifying for benefits in the future.
The Social Security Administration provides detailed guidance on how it evaluates trusts for SSI eligibility.
What Are the Two Types of Supplemental Needs Trusts?
There are two primary types of supplemental needs trusts:
- A first-party supplemental needs trust
- A third-party supplemental needs trust
The key difference is where the trust property comes from. A first-party SNT holds assets belonging to the person with a disability. A third-party SNT holds assets provided by someone else, such as a parent, grandparent, or other family member.
First-Party Supplemental Needs Trust
A first-party SNT, also called a self-settled SNT or a d4A trust, is funded with assets belonging to the person with a disability. These funds may come from an inheritance, personal injury settlement, savings, or another source.
Federal law permits certain first-party trusts to qualify as exceptions to the usual rules for counting trusts as available resources. An individual first-party SNT generally must meet the following requirements:
- The beneficiary must be an individual with a disability.
- The trust must be established and funded before the beneficiary turns 65.
- The trust must be established for the beneficiary’s sole benefit.
- The trust must contain the beneficiary’s own assets.
- The trust must provide for required Medicaid reimbursement after the beneficiary’s death.
A qualifying trust may be established by the individual with a disability, a parent, a grandparent, a legal guardian, or a court. The Social Security Administration explains these requirements in its guidance on exceptions to counting trusts as SSI resources.
Individual and Pooled First-Party Trusts
An individual first-party SNT is established for one beneficiary. The assets in the trust must be used for that beneficiary’s sole benefit.
A pooled trust is established and managed by a nonprofit organization. The organization maintains a separate account for each beneficiary but pools the accounts for investment and administrative purposes.
A pooled trust account may sometimes be established for a person who is 65 or older. However, transferring assets into the account after age 65 may create a Medicaid transfer penalty, depending on the applicable program and state law. Legal advice is essential before making such a transfer.
Medicaid Reimbursement
When the beneficiary of a first-party SNT dies, the state or states that provided Medicaid benefits generally must be reimbursed from the assets remaining in the trust, as required by federal law.
After the required Medicaid reimbursement has been made, any remaining trust property may pass to other beneficiaries named in the trust agreement.
The federal requirements for individual and pooled trusts appear in 42 U.S.C. § 1396p(d)(4).
Third-Party Supplemental Needs Trust
A third-party SNT can be created by someone who wants to provide money or property for an individual who has, or may later develop, a disability.
Unlike a first-party trust, a third-party SNT is funded with assets that never belonged to the beneficiary. A parent, grandparent, sibling, or another person may contribute to the trust.
A third-party SNT can be created through:
- A revocable living trust
- A will
- A separate revocable trust
- A separate irrevocable trust
A supplemental needs trust created through a will does not take effect until the person who made the will dies. It may also be subject to the time and expense of probate before the trust is funded.
A standalone third-party SNT can be established during the trustmaker’s lifetime. This makes it easier for grandparents, relatives, and other individuals to name the trust as a beneficiary or make gifts to it.
If you are the parent of an individual with a disability, consider including a third-party SNT in your estate plan. You should also let family members know that the trust exists.
Instead of leaving money directly to your loved one, relatives can direct gifts or inheritances to the trust. This helps prevent an outright inheritance from unintentionally affecting the beneficiary’s eligibility for means-tested benefits.
How Is a Third-Party SNT Different From a First-Party SNT?
The primary differences involve the source of the assets and what happens to the remaining property after the beneficiary dies.
| First-party SNT | Third-party SNT |
|---|---|
| Holds assets belonging to the beneficiary | Holds assets provided by another person |
| Generally requires Medicaid reimbursement | Generally does not require Medicaid reimbursement |
| Must comply with federal first-party trust requirements | Is governed by its terms and applicable trust and benefit rules |
| Remaining assets may pass to named beneficiaries after required reimbursement | The trustmaker can generally choose who receives the remaining assets |
Because a third-party SNT contains someone else’s property, federal law does not generally require the state Medicaid agency to be named as the remainder beneficiary.
Instead, the trustmaker can determine who will receive any property remaining after the beneficiary’s death. This makes a third-party SNT an effective option when providing for a loved one with a disability is your priority, but you also want to control where the remaining assets ultimately go.
What Can a Supplemental Needs Trust Pay For?
A supplemental needs trust is generally intended to add to, rather than replace, the benefits the beneficiary receives from government programs.
Depending on the trust terms and the benefits involved, trust funds may be used for expenses such as:
- Education and training
- Transportation
- Recreation and hobbies
- Computers and other technology
- Clothing and personal items
- Uncovered medical and dental care
- Caregiving and personal assistance
- Travel and entertainment
- Household furnishings
- Other services that improve the beneficiary’s quality of life
The rules governing distributions are complicated. A payment that is permitted under the trust agreement could still affect a particular public benefit.
For example, distributions involving food or shelter may affect SSI payments. Cash paid directly to the beneficiary may also be treated differently from a payment made by the trustee to a third-party provider.
Why the Trustee Must Understand Benefit Rules
The trustee must follow both the trust instructions and the rules of each government program providing benefits to the beneficiary.
Before making a distribution, the trustee may need to determine:
- Whether the expense is permitted by the trust
- Whether the payment should be made directly to a provider
- Whether the distribution will be treated as income
- Whether the distribution could reduce SSI benefits
- Whether documentation should be retained
- Whether the benefit agency must be notified
Trustees must take great care when giving money to the beneficiary or spending money on the beneficiary’s behalf. Improper distributions could reduce benefits or cause the beneficiary to lose eligibility.
A trustee who is unfamiliar with special needs planning should seek professional guidance before making questionable distributions.
Include the Trust in Your Estate Plan
If you want to provide for a person with a disability or special needs after your death, it is important to address that goal directly in your estate plan.
Simply naming the individual as a beneficiary of your will, trust, life insurance policy, or retirement account may result in an outright inheritance. That inheritance could interfere with eligibility for means-tested government benefits.
A properly drafted and funded supplemental needs trust can help preserve benefit eligibility while providing additional resources to improve your loved one’s quality of life.
The trust must also be coordinated with your beneficiary designations. Otherwise, assets from a life insurance policy or retirement account could pass directly to the individual instead of the trust.
We Are Here to Help
At McDonald Law Firm, we can discuss your goals and help you decide which type of supplemental needs trust is appropriate for your loved one.
Contact Andre O. McDonald, a knowledgeable Howard County, Montgomery County, and District of Columbia special needs planning attorney, to schedule a consultation:
- Howard County: 443-741-1088
- Montgomery County: 301-941-7809
- District of Columbia: 202-640-2133
You may also request a consultation online.
DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL, INSURANCE, OR TAX ADVICE.
