A special needs trust- sometimes called a “supplemental needs trust”- provides for the needs of a disabled person without disqualifying him or her from benefits received from government programs such as Social Security and Medicaid. A special needs trust makes it possible to appoint a trustee to maintain assets and retain or qualify for public assistance benefits.
The first thing that may come to mind for most families who have had experience with government benefits is that the government says that a person with a disability cannot have a trust. Correct. However, the special needs trust does not belong to the person with a disability. The trust is established and administered by someone else- the trustee. The person with the disability does not have a trust. He or she is nominated as a beneficiary of the trust and is usually the only one who receives the benefits. Furthermore, the trustee (manager) is given the absolute discretion to determine when and how much the person should receive.
The primary purpose of a third party special needs trust is to preserve government benefits for disabled beneficiaries. Usually the benefits involved are from government programs that have eligibility requirements. Receipt of an inheritance will disqualify the beneficiary for future government benefits. Two of the programs that are based on financial need are Supplemental Security Income (SSI) and Medi-Cal, which is the California version of the Medicaid program. Housing subsidies, also called the Section 8 program, In Home Support Services, food stamps, and utility payment assistance are also based on financial need. However, Social Security and Medicare are not based on financial need, but are instead based on the applicant’s age and earnings record.
Family-Type Special Needs Trusts
The parents provide the money for the trust, often by will, and sometimes by purchasing life insurance payable to the trust. Some parents place their property in a “living” or “inter vivos” trust, and provide in the trust that the disabled son or daughter is the beneficiary. With that type of trust, there is no need to wait for the parents to die. The trust becomes effective immediately. This is a good idea for families where aunts, uncles, and grandparents might want to leave money for the trust. Anyone can give money to the trust, by either writing a check or writing a will.
The key to a family-type special needs trust is that the money CANNOT be used for housing, food, or clothing. Those are considered “basic needs” under SSI and Medicaid laws. If the disabled person is receiving free housing, food or clothing from someone else, including a family member or a trust, then the government benefits will be reduced or eliminated.
The parents can provide the money for this type of trust, and so can other family members, such as grandparents, aunts, and uncles. The only person who cannot place money into this type of trust is the disabled person.
Court Ordered Special Needs Trust
A court-ordered trust, also called a Type “A” special needs trust, is used only for special circumstances, such as where the person with a disability has inherited money, or received a court settlement. Because the disabled person actually owns the money, the funds cannot be put into the usual special needs trust such as parents usually set up.
The “A” comes from the last letter of the federal statute, 42 U.S.C. § 1396p (d) (4) (A).
Only certain people are allowed to set up this type of trust:
1. The disabled person’s parent
2. The disabled person’s grandparent
3. The legal guardian
4. A court
To qualify, the disabled person has to be under 65 years old and meet the medical standards of Social Security, in terms of the disability. Someone who is not disabled enough to qualify for Social Security cannot have this type of trust.
The trust has to specify that after the disabled person has died, anything left over will pay back the State of residence for whatever medical assistance the government provided to the individual after the trust was set up.
Pooled Special Needs Trust
This trust has to be established through a non-profit association. Anyone can put money into pooled trust- parents, grandparents, or even the individual with a disability (the “beneficiary”). The trusts pool the funds of many beneficiaries to invest and manage. Although the funds are pooled, each beneficiary still has his or her own account. A big advantage of pooled trusts is that they are willing to handle much smaller accounts than a bank or trust company, so people of modest means can have access to sophisticated trust services. The nonprofit agency that administers the trust takes care of all the tax preparation, investment decisions, and serves as trustee. Any money left in the trust after the beneficiary dies, stays in the trust to help other persons with disabilities. The money does not go to the State.
A pooled trust can purchase a home for the beneficiary, and rent it to him or her. Before the pooled trust is set up, the parents and other family members explain what they want the trust to pay for, and who should be consulted about these matters. In addition, you have to be considered physically or mentally “disabled” the same as anyone who receives Social Security or SSI.
All Special Needs Trusts are complicated legally binding documents. Please consult a qualified trust attorney that has experience establishing these types of trusts.