Special Needs Trusts (SNTs) play a crucial role in protecting the financial future of individuals with disabilities while preserving their eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). Without proper planning, an inheritance or financial gift could disqualify a beneficiary from these essential programs. Understanding the rules governing SNTs is critical for ensuring compliance and maximizing available resources.
If you need legal assistance with setting up a Special Needs Trust, contact us online or call 414-253-8500 to speak with an experienced attorney.
What Is a Special Needs Trust?
A Special Needs Trust (SNT) is a legal arrangement designed to hold and manage assets for a person with disabilities without affecting their eligibility for means-tested government programs like Medicaid and SSI. The trust provides funds for expenses not covered by these programs, such as:
- Medical and dental care beyond Medicaid coverage
- Recreational activities and travel
- Personal care assistance
- Education and training
- Specialized equipment and therapy
SNTs ensure that individuals with disabilities can benefit from additional financial resources while still receiving critical government assistance.
Types of Special Needs Trusts and Their Medicaid & SSI Implications
There are three main types of Special Needs Trusts, each with different eligibility requirements and implications for Medicaid and SSI:
1. First-Party Special Needs Trust (Self-Settled SNT)
A First-Party Special Needs Trust is funded with the beneficiary's own assets, such as:
- A personal injury settlement
- An inheritance received outright
- Existing savings and assets
Medicaid & SSI Rules for First-Party SNTs
- Established by a parent, grandparent, guardian, or court for a disabled individual under age 65.
- Irrevocable, meaning the beneficiary cannot revoke or alter the trust.
- Payback Provision: Upon the beneficiary's death, any remaining funds must be used to reimburse Medicaid for benefits received during their lifetime.
- Funds must be used for the beneficiary's sole benefit, ensuring the assets do not directly replace government-provided benefits.
2. Third-Party Special Needs Trust
A Third-Party Special Needs Trust is funded with assets belonging to someone other than the beneficiary, typically parents, grandparents, or other family members.
Medicaid & SSI Rules for Third-Party SNTs
- No Medicaid payback requirement after the beneficiary's death-remaining funds can go to other heirs.
- Assets in the trust are not counted as resources for Medicaid and SSI eligibility.
- Must be properly structured to ensure distributions do not count as income, which could reduce or eliminate benefits.
3. Pooled Special Needs Trust
A Pooled Trust is a type of First-Party or Third-Party SNT managed by a nonprofit organization. The funds of multiple beneficiaries are pooled for investment purposes but are maintained in separate sub-accounts.
Medicaid & SSI Rules for Pooled SNTs
- Available to individuals of any age (although Medicaid recovery rules may apply for those over 65).
- Payback requirement applies if it is a First-Party Pooled Trust.
- Managed by a nonprofit trustee, reducing administrative burdens on family members.
Comparison of First-Party, Third-Party, and Pooled Special Needs Trusts
| Feature | First-Party SNT | Third-Party SNT | Pooled SNT |
|---|---|---|---|
|
Who Funds It? |
Beneficiary (own assets) |
Family members or other third parties |
Multiple beneficiaries' assets, managed by a nonprofit |
|
Impact on Medicaid & SSI Eligibility |
Assets are exempt if properly structured |
Assets are exempt if properly structured |
Assets are exempt if properly structured |
|
Medicaid Payback Required? |
Yes |
No |
Yes (if First-Party) |
|
Who Can Establish It? |
Parent, grandparent, guardian, court, or beneficiary (if capable) |
Anyone except the beneficiary |
A nonprofit organization |
|
Control Over Funds |
Trustee manages distributions |
Trustee manages distributions |
Nonprofit trustee manages funds |
|
Best For |
Individuals who receive large settlements or inheritances |
Families looking to provide financial support without affecting benefits |
Those who prefer a professionally managed trust with lower setup costs |
How Special Needs Trusts Protect Medicaid & SSI Eligibility
Both Medicaid and SSI have strict income and asset limits. As of 2024, an individual receiving SSI cannot have more than $2,000 in countable resources ($3,000 for a couple). Any amount exceeding this limit can result in disqualification from benefits.
Key Strategies for Maintaining Eligibility
- Assets held in a properly structured SNT are not counted as available resources.
- Distributions must be made carefully-funds should go directly to service providers rather than to the beneficiary, as direct cash payments can be counted as income.
- Funds can supplement but not replace government-provided services, ensuring they enhance rather than duplicate benefits.
What Can and Cannot Be Paid for Using a Special Needs Trust?
A properly structured Special Needs Trust (SNT) ensures that funds are used in ways that do not interfere with Medicaid or Supplemental Security Income (SSI) eligibility. The Social Security Administration (SSA) and Medicaid agencies carefully evaluate how trust distributions are made.
Allowable Expenses That Won't Affect Benefits
Funds from a Special Needs Trust can be used for:
- Medical expenses not covered by Medicaid (e.g., alternative therapies, dental work, eyeglasses)
- Personal care services (e.g., home health aides, private nursing)
- Education and training (e.g., tuition, books, vocational programs)
- Transportation (e.g., purchasing a vehicle, paying for ride services)
- Recreational activities (e.g., vacations, entertainment, hobbies)
- Technology and electronics (e.g., computers, assistive devices)
- Furniture and home modifications (e.g., wheelchair ramps, accessible bathrooms)
Expenses That Could Affect Medicaid or SSI
Certain payments made directly to the beneficiary or for specific expenses may reduce benefits or lead to ineligibility. These include:
- Cash distributions: Direct payments to the beneficiary count as income and can disqualify them from SSI.
- Housing expenses: Paying rent, mortgage, or utilities from the trust can reduce SSI benefits.
- Food expenses: Buying groceries or providing food can be considered "in-kind support and maintenance" and lower SSI payments.
To avoid issues, the trustee should pay vendors directly rather than giving cash to the beneficiary.
Common Allowable vs. Non-Allowable Trust Expenses for SSI & Medicaid
| Allowable Expenses (Won't Affect Benefits) | Non-Allowable Expenses (May Reduce SSI or Affect Medicaid) |
|---|---|
|
Medical care not covered by Medicaid |
Direct cash payments to the beneficiary |
|
Personal care assistants |
Rent, mortgage, or utility payments (can reduce SSI benefits) |
|
Education and training |
Food and grocery expenses (considered "In-Kind Support") |
|
Transportation (e.g., car purchase, ride services) |
Paying for items that duplicate government benefits |
|
Recreation, vacations, and hobbies |
Giving the beneficiary unrestricted access to funds |
|
Home modifications (e.g., wheelchair ramps) |
Payments made incorrectly (e.g., direct checks to the beneficiary) |
Medicaid Payback Rules for First-Party Special Needs Trusts
One of the most critical aspects of First-Party Special Needs Trusts is the Medicaid payback provision. Upon the beneficiary's death, any remaining funds must be used to reimburse Medicaid for the cost of medical care provided during their lifetime.
Key Considerations for Medicaid Payback:
- Payback applies only to First-Party SNTs, not Third-Party SNTs.
- Funds are used to repay the state Medicaid program before any remaining assets go to heirs.
- If Medicaid payments exceed the remaining assets, the trust balance goes entirely to Medicaid.
Families looking to protect assets for heirs often prefer Third-Party SNTs, as they do not require Medicaid payback.
Choosing the Right Trustee for a Special Needs Trust
Selecting the right trustee is critical to ensure that funds are managed correctly and in compliance with Medicaid and SSI regulations. A trustee is responsible for handling trust assets, making distributions, and keeping detailed records.
Types of Trustees for an SNT
-
Family Member Trustee
- Can provide personal care and attention.
- May lack experience with complex trust and government benefit rules.
-
Professional Trustee (Attorney, CPA, or Bank)
- Ensures compliance with SSI and Medicaid rules.
- Charges fees for management and legal oversight.
-
Nonprofit Trustee (Pooled Trusts)
- Managed by organizations specializing in special needs planning.
- Ideal for smaller trusts or when a professional trustee is needed.
A trustee should be financially responsible, knowledgeable about disability benefits, and committed to the beneficiary's well-being.
Alternatives to Special Needs Trusts: ABLE Accounts
An ABLE Account (Achieving a Better Life Experience Account) is another tool that allows individuals with disabilities to save money without losing SSI or Medicaid benefits.
Key Differences Between ABLE Accounts and SNTs
| Feature | ABLE Account | Special Needs Trust (SNT) |
|---|---|---|
|
Eligibility |
Must have a disability onset before age 26 |
No age restrictions |
|
Contribution Limits |
$18,000 per year (2024 limit) |
No annual contribution limit |
|
Medicaid Payback |
Yes, Medicaid may claim remaining funds |
Only applies to First-Party SNTs |
|
Control Over Funds |
Beneficiary can manage funds |
Trustee controls funds |
|
Use of Funds |
Must be for "qualified disability expenses" |
Broader use for beneficiary's benefit |
ABLE accounts can complement Special Needs Trusts but are generally not a substitute for more significant financial planning needs.
Setting Up a Special Needs Trust: Legal Considerations
Establishing an SNT requires careful legal planning to ensure compliance with Medicaid and SSI rules. Key legal steps include:
- Determining the right type of trust (First-Party, Third-Party, or Pooled).
- Naming a trustee with experience in managing funds for individuals with disabilities.
- Structuring distributions to avoid reducing government benefits.
- Including necessary provisions to comply with federal and state Medicaid laws.
- Funding the trust properly, using sources like inheritances, life insurance, or personal injury settlements.
Given the complexities involved, working with an attorney ensures that the trust is structured correctly and legally sound.
Contact a Special Needs Trust Attorney for Assistance
Setting up a Special Needs Trust requires careful planning to ensure Medicaid and SSI eligibility while protecting a loved one's financial future. An experienced estate planning attorney can help you navigate the process and select the best trust structure for your needs.
Contact us today to schedule a consultation. Call 414-253-8500 or use our online form to get started.
Frequently Asked Questions (FAQs)
1. Can a person have both a Special Needs Trust and an ABLE account?
Yes, a person with disabilities can have both a Special Needs Trust (SNT) and an ABLE account. An SNT is ideal for holding larger sums of money and providing long-term financial security, while an ABLE account allows the beneficiary to manage some funds independently for qualified disability expenses without jeopardizing government benefits.
2. How does a Special Needs Trust affect Medicaid eligibility?
A properly structured Special Needs Trust does not affect Medicaid eligibility because assets held in the trust do not count as personal resources for means-tested programs. However, for First-Party SNTs, Medicaid may require reimbursement from remaining trust funds upon the beneficiary's death.
3. What happens if an SNT is not set up correctly?
If an SNT is not properly structured, the assets in the trust may be counted as resources, potentially disqualifying the beneficiary from Medicaid and SSI. Common mistakes include improper distributions (e.g., giving cash to the beneficiary) and failing to include required Medicaid payback provisions in a First-Party SNT. Consulting an experienced attorney ensures compliance with all legal requirements.
4. Can a Special Needs Trust pay for housing and food?
A Special Needs Trust can pay for housing and food, but doing so may reduce the beneficiary's SSI benefits. The Social Security Administration (SSA) considers these expenses "In-Kind Support and Maintenance (ISM)," which can lower monthly SSI payments. Careful planning is needed to avoid unnecessary reductions in benefits.
5. Who can serve as a trustee for a Special Needs Trust?
A trustee can be a family member, professional trustee (e.g., attorney, CPA, bank), or nonprofit organization. The trustee must be financially responsible and familiar with Medicaid and SSI rules to ensure proper management of trust funds. Many families choose a professional trustee or Pooled Trust for expert oversight.