Individuals with disabilities often rely on government benefits like Supplemental Security Income (SSI) and Medicaid to cover essential living and healthcare expenses. However, receiving an inheritance or a financial gift can unintentionally disqualify them from these crucial programs due to asset limits. A Special Needs Trust (SNT) offers a legal solution to this problem, allowing individuals with disabilities to receive financial support while maintaining their eligibility for public assistance.
If you have a loved one with special needs, proper estate planning is essential to ensure they are cared for without jeopardizing their benefits. Contact us by either using our online form or calling 414-253-8500 for legal assistance in setting up a Special Needs Trust.
What Is a Special Needs Trust?
A Special Needs Trust (SNT) is a legal arrangement designed to hold and manage assets for the benefit of an individual with disabilities without affecting their eligibility for government assistance programs. The trust provides supplemental financial support for expenses that public benefits do not cover, such as:
- Education and training
- Transportation
- Assistive technology
- Home modifications
- Personal care attendants
- Recreational activities
Since the trust owns the assets rather than the beneficiary, those assets are not counted towards the individual's financial resources for means-tested programs like SSI and Medicaid.
How Government Benefits Are Protected
1. Preserving SSI Eligibility
SSI is a means-tested program, meaning an individual must have limited income and resources to qualify. Generally, an individual can only have $2,000 in assets ($3,000 for couples) to remain eligible. If they inherit money directly, they may exceed this limit and lose their benefits.
A Special Needs Trust ensures that assets are not counted toward the SSI resource limit because the funds are controlled by a trustee and used only for approved supplemental expenses. This way, the individual can still receive their monthly SSI payments while benefiting from additional financial support.
2. Maintaining Medicaid Coverage
Medicaid provides vital healthcare services, including hospital visits, prescription medications, and long-term care. Losing Medicaid eligibility can be devastating, as private insurance may not offer comparable coverage.
By placing assets in an SNT, the individual remains eligible for Medicaid because the trust funds are not considered their personal assets. This ensures continued access to essential medical care.
3. Avoiding Financial Disqualification from Other Programs
In addition to SSI and Medicaid, many state and federal assistance programs have strict asset limits. An SNT can help preserve eligibility for:
- Housing assistance programs (such as Section 8)
- Supplemental Nutrition Assistance Program (SNAP)
- State disability assistance programs
4. Providing Financial Management & Protection
A trustee manages the funds within the Special Needs Trust, ensuring that they are used appropriately and in the beneficiary's best interest. This protects individuals with disabilities from financial exploitation and mismanagement while ensuring they have the resources they need for a better quality of life.
Types of Special Needs Trusts
There are three main types of Special Needs Trusts (SNTs), each designed for different situations. Understanding their differences is crucial when planning for a loved one's financial future.
1. First-Party Special Needs Trust
A First-Party SNT is funded with the disabled individual's own assets, such as:
- An inheritance they received
- A personal injury settlement
- Savings or assets in their name
Key Features:
- The trust must be irrevocable (cannot be changed or revoked).
- The beneficiary must be under 65 years old when the trust is established.
- Upon the beneficiary's death, any remaining funds must be used to repay Medicaid for services provided during their lifetime.
First-Party SNTs are commonly used when an individual with disabilities receives a large sum of money and wants to protect their eligibility for government benefits.
2. Third-Party Special Needs Trust
A Third-Party SNT is funded with assets from someone other than the beneficiary, such as parents, grandparents, or other family members.
Key Features:
- The trust can be created during the donor's lifetime (Living Trust) or through a Last Will and Testament (Testamentary Trust).
- There is no Medicaid payback requirement-remaining funds can be distributed to other beneficiaries after the disabled individual's death.
- It is an ideal option for parents and family members looking to provide long-term financial support for a loved one with disabilities.
Since Third-Party SNTs are not funded with the disabled person's own assets, they are the most flexible and widely used type of Special Needs Trust.
3. Pooled Special Needs Trust
A Pooled SNT is managed by a nonprofit organization and combines funds from multiple beneficiaries into one large trust. Each beneficiary has a separate account managed by the nonprofit.
Key Features:
- Available to anyone with disabilities, regardless of age.
- More cost-effective than creating an individual trust.
- Upon the beneficiary's death, some funds may remain with the nonprofit to help others with disabilities.
Pooled SNTs are a great option for individuals who do not have a family member or trustee to manage the trust.
Comparison of Special Needs Trust Types
| Feature | First-Party SNT | Third-Party SNT | Pooled SNT |
|---|---|---|---|
|
Who Funds It? |
Individual with disabilities |
Family or friends |
Multiple individuals (managed by a nonprofit) |
|
Purpose |
Protects personal assets while maintaining benefits |
Provides financial support from family without affecting benefits |
Cost-effective option for those without a private trustee |
|
Medicaid Payback Required? |
Yes |
No |
Sometimes (varies by nonprofit) |
|
Trustee |
Chosen by the beneficiary or court |
Family member, friend, or professional |
Managed by a nonprofit |
|
Best For |
Individuals receiving an inheritance or lawsuit settlement |
Parents or relatives planning for a loved one's future |
Those needing a professionally managed trust with lower costs |
Choosing the Right Special Needs Trust
When deciding which Special Needs Trust is best for your situation, consider:
- Who is funding the trust? (The individual vs. a third party)
- Does Medicaid reimbursement apply? (First-Party and Pooled SNTs require repayment; Third-Party SNTs do not.)
- How much money will be placed in the trust? (Larger amounts may require an individual SNT, while smaller amounts may be best suited for a Pooled SNT.)
An experienced estate planning attorney can help you evaluate your options and set up the best trust structure for your loved one.
Common Misconceptions About Special Needs Trusts
1. "A Person with Disabilities Can Just Receive an Inheritance Directly."
Receiving an inheritance directly can disqualify an individual from government benefits. Instead, assets should be placed into a Special Needs Trust to avoid exceeding financial limits.
2. "A Special Needs Trust Can Cover Any Expense."
SNTs are designed to cover supplemental expenses, not basic needs covered by SSI or Medicaid. Trust distributions must be carefully structured to avoid reducing government benefits.
3. "Special Needs Trusts Are Only for the Wealthy."
SNTs can be beneficial regardless of the amount of assets. Even small amounts of money can make a difference in improving the quality of life for an individual with disabilities.
4. "Any Family Member Can Manage the Trust."
Managing an SNT requires legal and financial knowledge. A professional trustee or someone with experience in disability planning is often the best choice.
Setting Up a Special Needs Trust
Creating an SNT involves several steps:
- Consult an Estate Planning Attorney - Legal guidance ensures the trust is properly structured.
- Choose the Right Type of SNT - Decide between First-Party, Third-Party, or Pooled SNT based on your needs.
- Select a Trustee - Choose a responsible person or institution to manage the trust.
- Fund the Trust - Add assets like cash, investments, or life insurance proceeds.
- Draft the Trust Agreement - Establish clear rules on how the trust will operate.
Contact an Attorney for Special Needs Trusts
A Special Needs Trust is one of the most effective tools for protecting a loved one's eligibility for government benefits while providing additional financial security. Setting up the trust correctly requires careful planning and legal expertise.
If you need assistance creating a Special Needs Trust, contact Heritage Law Office today. We can guide you through the process and ensure your loved one's financial future is secure. Call us at 414-253-8500 or fill out our online form to schedule a consultation.
Frequently Asked Questions (FAQs)
1. What expenses can a Special Needs Trust cover?
A Special Needs Trust (SNT) can pay for expenses that government benefits do not cover, such as education, personal care attendants, transportation, home modifications, assistive technology, and recreation. However, it cannot pay for basic needs like food and shelter if the beneficiary receives Supplemental Security Income (SSI), as this could reduce their benefit amount.
2. Can a Special Needs Trust be changed or revoked?
The ability to change or revoke an SNT depends on the type of trust. First-Party and Third-Party SNTs are typically irrevocable, meaning they cannot be changed once established. However, a Third-Party SNT may offer some flexibility through a designated trustee who can amend certain terms if needed. Pooled SNTs are managed by nonprofit organizations and may have their own modification rules.
3. Who can serve as a trustee for a Special Needs Trust?
A trustee can be a family member, friend, professional fiduciary, or a financial institution. It is essential to select someone knowledgeable about government benefit rules and capable of managing trust distributions properly. Many families opt for a professional trustee to ensure proper management and compliance with legal requirements.
4. How does a Special Needs Trust affect Medicaid eligibility?
A properly structured Special Needs Trust allows a beneficiary to retain Medicaid eligibility while using trust funds for supplemental expenses. However, First-Party SNTs require Medicaid payback, meaning any remaining funds after the beneficiary's death may be used to reimburse Medicaid for services provided. Third-Party SNTs do not have this requirement.
5. Can life insurance be used to fund a Special Needs Trust?
Yes, life insurance is a common funding source for a Third-Party Special Needs Trust. Parents or family members often name the trust as the beneficiary of their life insurance policy to ensure financial support for their loved one after their passing. This approach avoids direct inheritance, which could jeopardize government benefits.