If you want to provide for a loved one who is disabled or has special needs when you are no longer here, care must be taken to ensure that the inheritance you leave will help rather than harm your loved one. An inheritance received outright could negatively impact your loved one if he or she is currently receiving government aid or benefits or will need to apply for aid in the future.
Government benefits for individuals with mental or physical disabilities, such as Supplemental Security Income (SSI) or Medicaid, are need-based. To receive these benefits, an individual must pass a means test to ensure that the individual does not have adequate money or property that could be used to pay for care, such as nursing home costs, in-home care, medical equipment, therapy, or other necessities for proper care and living expenses. Suppose an individual with a disability or special need has too many resources, including property, money, or income. In that case, the individual will either be ineligible for government aid or may be subject to a penalty period during which the individual is required to spend down the money, own no property (unless it is co-owned by a spouse), and have little to no income in order to become eligible for aid.
Creating a special needs trust (SNT), also sometimes referred to as a supplemental needs trust, can help you provide for a loved one who is disabled or has special needs while maintaining your loved one’s current benefits or leaving open the option for need-based governmental aid in the future, even if your loved one receives an inheritance. As long as the SNT meets certain legal criteria, the existence of the SNT and the amount of money and property inside it will not affect your loved one’s means test.
There are two types of SNTs: a first-party SNT (also called a self-settled SNT or d4A trust) and a third-party SNT.
First-Party Special Needs Trust
Authorized under federal law, a first-party SNT is created by a disabled individual (trustmaker) using funds received through inheritance or a legal settlement. A first-party SNT can also be created by an individual who later becomes disabled and wants to qualify for government aid who has an income or asset limitation (means test). There are two types of first-party SNTs, both requiring the trustmaker to have the mental ability to create a trust: individual and pooled. Individual first-party SNTs are funded with (i.e., the trust owns) property that actually belongs to the disabled individual. The property in this trust must be used for the sole benefit of the disabled trustmaker, meaning the trustmaker is the only beneficiary of the trust. The trustmaker must be under the age of sixty-five and meet the definition of “disabled” when the trust is created. A pooled first-party SNT can be created by a disabled individual over the age of sixty-five in most states, but it may also be created by the parents, grandparents, or guardian of the disabled individual. The individual must also state that, at the disabled beneficiary’s death, the remainder of the trust property, up to the amount paid by the government aid (i.e., Medicaid) on behalf of or to the disabled beneficiary, must be paid back to the government. This is often referred to as state recovery of the aid the government paid to or on behalf of the disabled person. Any remaining amount can be paid to other beneficiaries that the disabled beneficiary named in the first-party SNT trust agreement.
Third-Party Special Needs Trust
By contrast, a third-party trust can be created by any person wishing to give money or property to an individual who is, or may become, disabled and therefore needs to apply and qualify for governmental aid. A third-party SNT can be created through a revocable living trust or a will (though an SNT created in a will would be subject to the time and expense of the probate process before it is officially created). A third-party SNT may also be a standalone, separate trust, either revocable (modifiable) or irrevocable (unmodifiable). A third-party SNT, often created by a disabled individual’s parent (trustmaker), makes it easier for other people, such as grandparents, family members, or others to name the trust as a beneficiary or to gift property or money to the trust for the benefit of the disabled beneficiary. If you are the parent of a disabled individual, consider adding a third-party SNT to your estate plan and let your family members know it exists. In lieu of cash or other direct gifts, people can use the trust to receive gifts or an inheritance, knowing that it will be set aside for their disabled loved one without hurting their loved one’s current government aid or any help they may need in the future. Any property or money in the third-party SNT will not be a countable resource of the beneficiary for any means-tested government benefit program.
The primary difference between a first-party and third-party SNT is that a third-party SNT does not require the government to be the beneficiary after the disabled beneficiary dies. Rather, the trustmaker remains in control and can name the ultimate beneficiary of any remaining trust property after the disabled individual’s death. This makes a third-party SNT an ideal solution if providing for a disabled loved one is your priority but you want to maintain some control over the remaining property and money.
Receiving Money from a Special Needs Trust
Both first-party and third-party SNTs must limit the payments made by the trustee to or on behalf of the disbled beneficiary, meaning that the trust property should only be used to supplement not replace what the disabled beneficiary is receiving in the form of government aid. Depending on the limits set forth by the government program providing the benefits to the disabled beneficiary, there may be a limit on the amount that may be spent on personal items. Trustees must take great care when giving money to or spending money on behalf of the disabled beneficiary to follow both the trust instructions as well as the laws and rules of the government program providing the benefits to the disabled individual to prevent the disabled individual from being disqualified or kicked off the aid program.
If you would like to provide for an individual who is disabled or has special needs at your death, it is important to do so in your estate plan. A properly drafted and funded SNT can ensure that your loved one maintains eligibility for potential government aid and also still has the funds to supplement the aid your loved one might receive. We can help discuss your options. Please call your Madison Estate Planning Attorneys today for a virtual appointment.
 See 42 U.S.C. § 1396p(d)(4)(A) (individual first-party special needs trusts) and 42 U.S.C. § 1396p(d)(4)(C) (pooled first-party special needs trusts).