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In This Section
Special Needs Trusts
A special needs trust (sometimes called a supplemental needs trust) is a legal document which sets up a way of providing benefits to an individual with a disability, while still allowing that person to be qualified for and to receive government benefits, particularly Medicaid and Supplemental Security Income (SSI). Special needs trusts are often necessary because anything other than a modest gift to an individual with a disability could disqualify the individual from public assistance because his or her resources will exceed the very low resource and income eligibility limits (about $2000). A special needs trust allows an individual with a disability to have money available for his or her benefit without the funds counting as a financial asset for benefit eligibility purposes.
There are two kinds of special needs trusts: (1) a third-party special needs trust, where the trust is created by an individual for the benefit of someone else (not a spouse); and (2) a self-funded special needs trust, where the individual's own money is used, for example when the individual receives a personal injury settlement. Both types of trusts should be created by an attorney with experience developing these particular kinds of trusts. Failure to appropriately set up the trust can disqualify the individual with a disability from government benefits and may even make the individual liable for paying back the value of past benefits that were provided during the existence of the trust.
A trust is a legal document containing instructions directing how resources placed in the trust (and owned by the trust) will be managed and used. The person who funds the trust is called the Grantor. The person for whom the trust is created is called the Beneficiary. The Grantor appoints a Trustee, who can be a person or a corporation, such as a bank, to manage the trust and make payments to the Beneficiary. Once established, the trust will be issued its own Employer Identification Number (EIN) by the Internal Revenue Service (IRS). The trust is not registered under the social security number (or EIN) of the Grantor, Beneficiary, or Trustee.
There are also "pooled" special needs trusts, where a non-profit agency serves as Trustee. In a pooled trust, a separate account is maintained for each individual Beneficiary, but all trust accounts in the pool are grouped for investment and management purposes. In a pooled trust, the assets remain in the trust after the death of the Beneficiary for the benefit of other individuals with disabilities.
Third-Party Special Needs Trust
State law governs third-party special needs trusts. Prior to 1987, in Pennsylvania, funds within a trust were considered available to the individual with a disability, and thus were required to be used before the individual could qualify for public benefits. This was also the case in many other states. Thus family members were forced to disinherit the individual with the disability or make gifts to others with the unenforceable request that the recipient of the funds provide financial help to the individual with the disability.
Currently, however, third-party special needs trusts are an accepted method of providing funds to supplement government benefits. In order for a third-party special needs trust to work as intended, it must:
- Expressly state that the beneficiary of the trust (the individual with a disability) is to rely on public assistance and should receive only supplemental benefits from the trust; the trust must state that public assistance should be considered before any income or principal from the trust is distributed;
- Be irrevocable;
- Must give the trustee (the person who manages the trust funds) total discretion to pay or refuse to pay money to the individual with a disability; attorneys advise against having a trust which makes monthly or scheduled payments, because this indicates that payments to the beneficiary are not discretionary.
Self-Funded Special Needs Trust
Federal law controls self-funded special needs trusts (sometimes called self-settled trusts). The Omnibus Budget Reconciliation Act of 1993 (OBRA) states that a trust is not a countable resource for SSI and Medicaid qualification purposes if certain conditions are met. Requirements for a self-funded trust include:
- The trust beneficiary must be an individual under age 65 who qualifies as "disabled;"
- The trust must be irrevocable;
- The trust must be created by a parent, grandparent, guardian, or a court;
- The trustee must have total discretion to pay or refuse to pay money to the individual with a disability; and
- When the individual with a disability dies, the trust must state that any remaining money and assets in the trust will be used to repay the state for Medical Assistance payments made on behalf of the individual during his or her life; (though the trust instrument must include this language, there are exceptions to the payback rule, which an attorney can explain).
What Can Trust Funds Be Used For?
Trust funds can be used for supplemental services and items which are not covered by Medicaid. Often a trust is used to enhance the quality of life for the beneficiary by providing for the purchase of additional support, services, therapies, and other items that are not covered by or adequately funded by government programs. Funds can also be used for extra clothing, vacations, social outings, and furniture. However, special needs trust funds may not be used for housing or food without jeopardizing public benefits. This is because Medicaid is designed to pay for these items. However, a trust may sometimes be used to add accommodations to a house to make it more accessible, or for a social outing where dinner is included. An attorney can provide guidance on individual situations.