Supplemental Needs Trust for Person with Disabilities

By Scott Koldin

This entry was posted on January 22, 2014

A Supplemental Needs Trust provides that income and principal may be made available to the person with disabilities but only to supplement and not to replace government benefits.

Federal and State legislation expressly exempts Supplemental Needs Trusts (Special Needs Trusts) from being considered available in determining eligibility for Medicaid or other government benefits provided that the Trust contains important language required by the law.

First Party Supplemental Needs Trust

The life savings and certain income of a person with disabilities can be transferred to a Supplemental Needs Trust for his/her benefit if he/she is under age 65. He/she could then qualify for immediate Medicaid coverage or other government benefits. There is no Medicaid transfer penalty period of ineligibility.

When the assets of the person with disabilities are used to fund the Trust, it is commonly known as a "First Party Supplemental Needs Trust."

When a Supplemental Needs Trust is funded with the assets of a person with disabilities, the Medicaid Agency must be designated as the primary remainder beneficiary to be reimbursed for any benefits paid on behalf of the person with disabilities. This is commonly known as a "Payback Provision." A second remainder beneficiary can be named to receive any balance left in the Trust.

Although this type of Supplemental Needs Trust is funded with the assets owned by a person with disabilities, the law requires that the Trust be created by a parent, grandparent, guardian or Court. The person with disabilities cannot create his/her own Trust. In order to avoid more expensive Guardianship or Court proceedings, it may be advisable for a person with disabilities to establish such a Trust while he/she has a living parent or grandparent even if the Trust will not be fully funded until a later time.

There is proposed legislation to allow a person with disabilities to establish his/her own Supplemental Needs Trust without the need to have it created by a parent, grandparent, guardian or Court.

This type of Trust can be very valuable in a personal injury situation. The injured person is no longer required to deplete personal injury settlements on the cost of care. A Supplemental Needs Trust can protect the settlement so he/she can qualify immediately for Medicaid. In addition, this type of Trust is useful in a situation where a person with disabilities directly inherits assets in his/her name that could cause him/her to lose governmental benefits.

However, in a personal injury lawsuit situation, the Medicaid Agency is entitled to be reimbursed for any expenses it already paid out towards the cost of care before the Supplemental Needs Trust can be funded. It is critical that parties to a personal injury case where Medicaid is involved need to be mindful that the Medicaid Agency is entitled to reimbursement from the entire settlement award and therefore when negotiating a settlement, the Medicaid Agency should be consulted to negotiate the amount of the recovery it will seek. Sometimes, to encourage settlements and in the interest of fairness, the Medicaid Agency may accept a lower recovery amount.

Once the settlement has been negotiated, there should then be a discussion on the advisability of establishing a First Party Supplemental Needs Trust to hold the funds.

This type of Trust can also be used when the person with disabilities is not spending all of his/her income and is accumulating savings above the level allowed by Medicaid, SSI or other government benefits.

Third-Party Supplemental Needs Trust

Anyone can create a Supplemental Needs Trust for the benefit of someone else. This is commonly known as a "Third Party Supplemental Needs Trust."

Unlike the First Party Supplemental Needs Trust that we discussed in the previous newsletter, a Third Party Supplemental Needs Trust does not have to designate the Medicaid Agency as the beneficiary of the Trust. When you set up a Third-Party Supplemental Needs Trust for the benefit of a person with disabilities, you can designate whoever you want to inherit any balance remaining in the Trust after the person with disabilities dies.

In the past, parents and grandparents could not make gifts to their children or grandchildren who had disabilities because those children or grandchildren would lose their government benefits because they would now have savings above the eligibility limits.

Now, with a Third-Party Supplemental Needs Trust, such gifts can be made to the Trust for the benefit of your child or grandchild to enjoy while you are living.

TESTAMENTARY SUPPLEMENTAL NEEDS TRUST

A child (or grandchild) with disabilities is often excluded as a beneficiary in a parent's (or grandparent's) Will to avoid the loss of government benefits. Most government benefits, including Medicaid, have strict financial eligibility rules. If the income and/or life savings of a person with disabilities are higher than the eligibility levels, he/she will not be entitled to receive benefits.

As part of your Estate Planning, you can now provide for your children or grandchildren with disabilities by establishing a Supplemental Needs Trust as part of the beneficiary provisions of your Last Will and Testament or as a beneficiary provision of your Revocable or Irrevocable Trust. This is commonly known as a "Testamentary Supplemental Needs Trust."

When you set up a Testamentary Supplemental Needs Trust for the benefit of a person with disabilities, you can designate whoever you want to inherit any balance remaining in the Trust after the person with disabilities dies.

The following example illustrates how parents often disinherit their children with disabilities:

Example: Tom and Mary Jones have 3 children, Jack, Jill, and Tracy. Jill has disabilities and receives government benefits. Tom and Mary currently have Wills that leave their entire estate to each other first and if the spouse is no longer living, they leave everything to Jack and Tracy. Jack and Tracy have promised Tom and Mary that they will make sure to use part of their inheritance to provide for Jill to supplement her government benefits. They disinherited Jill so that she won't lose her government benefits.

There are many problems with disinheriting children with disabilities and relying on other children to provide for them. Some examples include:

(1) The other children might develop a poor relationship with the child who is disabled and stop providing for them.

(2) The other children might have expenses of their own which they feel take priority over the needs of the person who is disabled because he/she is receiving government benefits.

(3) The other children might have problems in their lives such as bankruptcy, divorce, illness, lawsuit, and death, which could cause them to lose the funds they were holding for the child with disabilities.

(4) The other children could incur tax liabilities.

Parents can now avoid these risks by leaving the share of their child with disabilities to a Testamentary Supplemental Needs Trust. The parents can designate who they want to be the Trustee(s) of the Trust and they can designate who they want to receive the remaining funds on the death of the person with disabilities.

Grandparents who want to provide an inheritance for grandchildren no longer need to disinherit grandchildren with disabilities. They can leave the share of the grandchild with disabilities in a Testamentary Supplemental Needs Trust.

Parents and Grandparents can also designate on the beneficiary clause of their life insurance policies and retirement accounts to leave the share of their child or grandchild with disabilities to the Testamentary Supplemental Needs Trust established in their Will or Living Trust. Parents and grandparents should always review any tax implications with their accountant or financial planner.

Younger parents who have not built up a large nest egg often worry about how they will provide for a child with disabilities if they die unexpectedly. The use of life insurance combined with a Testamentary Supplemental Needs Trust often provides an ideal solution.

With a properly designed Supplemental Needs Trust, the quality of life for a person with disabilities can be greatly enhanced.

There are many factors to consider when deciding whether to establish a Testamentary Supplemental Needs Trust through your Last Will and Testament, Revocable Trust or Irrevocable Trust, or by establishing an immediate First-Party Supplemental Needs Trust or Third-Party Supplemental Needs Trust. The Koldin Law Center, P.C., is available to review the advantages and disadvantages of each of these options. We are available to handle the entire Medicaid application process to successfully obtain Medicaid coverage for the person with disabilities.