For many with a serious disability, health insurance is a major consideration and it becomes crucial to get coverage under Medicaid for many reasons.
A special needs trust is a way to assure your beneficiary is still eligible for any or all of these programs and has access to assets to pay for things not covered by those benefits. Because the trust is able to provide for their needs and has the same protections all irrevocable trusts have, they can be useful even if it does not require any of these programs.
A special needs trust is a type of discretionary trust that is specific for beneficiaries with long-term physical disabilities, psychological conditions, and/or cognitive deficits, especially those that will prevent them from managing their own finances. It can be referred to as a supplemental needs trust and allows beneficiaries needing extensive medical treatments, specialized equipment, assisted living facilities, and various other services for life to qualify for need-based benefits that have income limits.
Special needs trusts are predominantly created by parents for their children. Most of these trusts are testamentary trusts and are created and funded by your assets after you and your spouse have died. Less commonly, this type of trust can be created and used while you are still alive (living trust). A living special needs trust is preferable if others are going to contribute to the trust. Anyone but the beneficiary can donate assets to it, even those without any family relationship. Assets that can be added to the trust include:
It is possible for multiple trusts to be created for a particular beneficiary.
Special needs trusts have many features in common with any trust.
The primary goal of a special needs trust is to make sure your beneficiary is still able to receive Medicaid benefits for their healthcare and Supplemental Security Income (SSI).
Since Medicaid benefits are only available to those with very limited income and resources, too many personal assets could result in your child or dependent having no health insurance at all. For them to qualify for Medicaid, you cannot leave assets directly to them and need to form a special needs trust.
It is important to understand which assets do or do not affect eligibility for SSI or Medicaid in order to accomplish this.
For the trust to be eligible:
The trust must be formed before your beneficiary turns 65 years old (the age when everyone is eligible for Medicare).
Beneficiaries must meet the government’s definition of “disabled” when the trust is established and funded.
The trust agreement needs to be carefully worded to make it valid and absolutely clear on the directives and purpose of the trust.
There are some important components of a special needs trust to make it valid.
If it is a living trust, it can be revocable and you can be a trustee and name a successor. If the trust is created at your death, it is best to name a trustee who knows the beneficiary such as a surviving parent, sibling, or other close family member or friend. It is best if the trustee and/or successor trustee is not at significant risk of dying before your beneficiary. The trustee may need additional qualities to care for a disabled beneficiary that may include:
The duties of the trustee are similar to all trusts, but additional responsibilities may include:
There are specific items the trustee can use the funds for that will not interfere with your beneficiary’s Medicaid and SSI benefits.
The trust ends when it is no longer needed, including when the:
Special needs trusts can be designated as first-party and third-party depending upon whose assets funds the trust, yours or your beneficiary’s.
A first-party or self-settled special needs trust will be needed if a person with a disability inherits money or property outright, receives a court settlement from a lawsuit, gets alimony, or has retirement funds. They may be used when a person without a prior disability owns assets and later become disabled. They may be referred to as Medicaid Payback Trusts, OBRA (Omnibus Budget and Reconciliation Act) ’93 Trusts, and d4A or d4C Trusts.
Although special needs trusts are predominantly created by parents, grandparents or other legal guardians, federal law also authorizes a mentally and legally competent beneficiary to establish an individual first-party trust for themselves without court involvement. They must be less than 65 years old.
A third-party special needs trust is usually created and funded by you to assure that your loved one with special needs is provided for. Although most likely set up by a parent of the beneficiary, it could be a grandparent, sibling, or any other person wishing to provide for them.
A stand-alone third-party special needs living trust is created by you and used by the beneficiary while you are alive.
Pooled special needs trusts are established and administered by a non-profit organization for the benefit of multiple beneficiaries and are not part of an individual or family estate plan.