Protecting government benefits with special needs trusts
Special Needs Trust (SNT) is a trust created to supplement the needs of a person whose necessary medical or living expenses are paid for through programs such as Medicaid or SSI. Because these programs are “means-tested”—based in part on income—SNT enables a beneficiary to continue receiving assistance despite an increase in income or assets. Generally, surplus funds are placed into the SNT, which then pays for those of the beneficiary additional needs such as recreation and consumer goods that are not otherwise covered by government assistance. Here’s a few examples:
Divorce and a disabled child. Children with disabilities who receive SSI risk a reduction or termination of benefits when one parent is required to pay child support. Receiving child support can reduce SSI benefits by one-third for children under 18 and dollar for dollar for children 18 and older. Instead of the funds being transferred directly, child support can be placed into SNT, which diverts the income away from the child. Because SSI provides food, shelter, and utilities, SNT can pay something else life-enhancing benefits such as holidays, electronics or specialist vehicles – all of which preserve the child’s entitlement 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 a “penalty” for the defendant’s misconduct. However, disabled people who receive SSI and Medicaid run the risk of being disqualified from receiving a lump sum. In addition, Medicaid may be entitled to reimbursement against the medical care portion of the settlement. To avoid disqualification from these important government benefits, an SNT can be created to receive the net settlement proceeds. The money placed in the SNT can then be used to buy additional goods and services that enhance rather than replace government benefits. Similar to the example above, SNT funds can be used to plan vacations for people with disabilities, purchase specially equipped vehicles, and provide other amenities, including consumer goods or beauty services.
Third Party SNTs. A third party special needs trust includes the same concepts as described above. However, SNT is financed with the assets of a third side in favor of the disabled person. For example, a grandparent, friend or other person who is not legally responsible for the beneficiary can set up an SNT to pay for the additional needs of another. In addition to supporting the disabled person, a donor who funds a third-party SNT for the benefit of their disabled child can partially avoid the five-year lookback period for their own Medicaid eligibility.
It deserves a look. Special needs trusts can be a powerful tool in planning the continuing care of a person with a disability or helping the trustee achieve their own Medicaid eligibility. You may want to explore whether SNT is right for you or someone you love.
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