The Problem. You have a disabled child who is currently receiving need-based public assistance such as Supplemental Security Income (SSI) and Medicaid. Your child is receiving those benefits because he or she is disabled and because he or she does not have sufficient income and resources. As a parent, you want to make sure that your child is provided for after your death. This is especially true in the case of a disabled child. Your plan to provide for your disabled child probably includes a life insurance policy in addition to assets you have accumulated over your life time. But what happens to your child’s eligibility for SSI and Medicaid if they suddenly receive a significant amount of money in the form of inheritance and life insurance proceeds. The answer is that your child will lose the monthly SSI check and, more importantly, health insurance coverage through Medicaid. Is there a way to provide for your disabled child after your death without endangering their public disability benefits?
The Solution. The Special Needs Trust (SNT) is the answer. If your Will and beneficiary designations direct the assets into a properly drafted SNT, your disabled child will continue to receive their SSI and Medicaid coverage.
To understand how this works, first we need to discuss trusts in general. A trust is just an agreement between a grantor (the one with the money or property) and a trustee in which the trustee agrees to accept and hold money (or other property) for the benefit of someone else. Commonly parents, instead of giving assets to a minor, will give assets to a trustee who will hold the property or money for the minor until the minor reaches an appropriate age. Until the child reaches that age, the trustee will be tasked with using the money for the minor’s benefit. (See Avoid Naming Your Minor Children As Beneficiaries)
A SNT is a special type of trust created by statute. 42 U.S.C. §1396p(d)(4). If the requirements of the statute are followed, any money (or other property) put into the SNT will not be considered an available resource to a disabled beneficiary. Thus, the trust property will not cause the disabled beneficiary to lose their SSI and Medicaid.
Key Features of a Special Needs Trust
1. Beneficiary has no right to demand assets
The disabled beneficiary can have no right to demand any income or principal from the trust. This is the key feature. If the disabled beneficiary could demand payment, then the money in the trust would be available to the disabled beneficiary and thus the entire amount of the trust would be used to disqualify the person for SSI and Medicaid.
Thus in a SNT, the trustee must have complete discretion to use the money as they see fit. The disabled beneficiary can ask for whatever they want but the trustee has the ultimate authority whether not to expend the trust income or principal.
2. Trust funds cannot be used for basic necessities
The second key feature of a SNT is that the trustee cannot use the trust assets to pay for services being provided for by public assistance. The monthly SSI check is for the basic necessities of clothing, food and shelter. Thus the trust cannot be used for clothing, food or shelter. Then what can we do with the trust? The answer is everything else. The trust could be used to pay for a car, a computer, a vacation, etc. Think of the trust as a tool to enhance the quality of the disabled beneficiary’s life. It is not a mechanism to pay for their basic needs which are, theoretically, being taken care of by SSI and Medicaid.
Different Types of Special Needs Trusts
1. Self settled
A self settled SNT is one in which the disabled person’s own money (or money to which the disabled person is entitled) is being used to fund the trust. Examples of self settled SNTs are where the trust is funded with:
a recovery in a personal injury lawsuit,
a settlement of a workers’ compensation claim, or
In each of these examples, the disabled person is entitled to the funds being used to create the trust.
There are two disadvantages to this type of SNT. First, it typically will require approval. In Maryland, the trust has to be approved by the State Attorney General and, most likely, a circuit court. This is expensive and time consuming. The second disadvantage occurs at the death of the disabled beneficiary. If the disabled beneficiary had used Medicaid at any point during their life, Medicaid will have to be paid back out of the remaining trust assets before any money can be distributed to heirs. This is referred to as a payback provision.
Unfortunately, the self settled SNT is the only real option for personal injury recoveries and workers’ compensation settlements. This is not the case with inheritances. If the parent (or any other person) plans ahead, they can create a third party SNT prior to death and avoid both the approval process and payback.
2. Third party
In contrast with a self settled trust, a third party trust is funded with money coming from somebody else – not the disabled person. The most common third party SNT is when a parent creates a SNT for their disabled child. They money is the parent’s money, not the child’s money. The third party SNT is preferred over a self settled SNT for two reasons. First, approval is not required. So, for instance, a parent could draft a SNT into their Will and it never has to be approved by anyone. Second, there is no payback required. The terms of the SNT will determine who gets the remaining trust assets at the disabled beneficiary’s death.
In a pooled SNT, a non profit organization (NPO) has already drafted a SNT and had it approved by the appropriate state officials. Disabled persons can then join the SNT. The NPO keeps a separate account for each beneficiary but pools the money together for investment purposes. The NPO serves as the trustee. The pooled SNT has some distinct advantages. First, there is no need to get the trust approved. This can save significant time and expense. Second, the NPO handles all of the investment and generally earns a better rate of return because the assets are pooled. Third, the NPO’s trustees are well versed in SNT law and understand what types of expenses can and cannot be paid to ensure that the disabled person remains on SSI and Medicaid.
In conclusion, any parent of a disabled child should seriously consider creating an SNT to protect your child’s right to future public assistance. Once the SNT is established you would then just make sure that all assets go to the SNT at your death instead of to your disabled child directly. So in your Will, you need to direct your assets to the SNT, not the disabled child. For all the non probate assets (life insurance, 401ks, etc), you need to remove your disabled child as the beneficiary and instead designate the SNT.