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The Montana Estate Lawyer

Friday, April 8, 2011

Planning with Special Needs Trusts

Parents sometimes think they must disinherit their disabled child in order to preserve his or her SSI/Medicaid benefits.  However, these benefits rarely provide more than subsistence.  Plus, this “solution” does nothing to help their child after they are incapacitated or die.  Consider using a “Special Needs Trust.”  This trust will provide funds to pay for certain expenses that enhance the child’s quality of life while preserving benefits. 

There are two types of Special Needs Trusts--one created with the beneficiary's money (self-settled or first-party trust), and one created with someone else's money (third-party trust).

Under the Medicaid rules, when a Medicaid beneficiary transfers his or her assets to another person, he or she is penalized.  A self-settled Special Needs Trust is an exception to the transfer rules.  It is also referred to as a “pay back trust” because it must include a provision requiring that Medicaid be paid back upon the beneficiary's death for Medicaid services provided to the beneficiary during his or her lifetime, to the extent that funds remain in the trust. There are other specific requirements for a self-settled Special Needs Trust, the most critical being that it is established and funded for a disabled person under the age of 65, it is established by a parent, grandparent, guardian or court, and that it is irrevocable.

A third-party special needs trust is one in which another person, such as a parent, creates a trust for a disabled person and uses his or her own assets, not the disabled person’s assets, to fund the trust.  Because of this, no Medicaid pay back provision is required to be in the trust.  Third-party trusts provide wonderful planning opportunities, such as, for example, funding the trust upon the parent’s death with the proceeds of life insurance.

In order to determine whether a Special Needs Trust is appropriate, it is necessary to know whether the person is receiving SSI, Medicaid or SSDI benefits.  Supplemental Security Income (SSI) is a means-tested program.  “Means tested" means that an individual's eligibility is based financial status, as measured by income and resources.  SSI benefits are paid to eligible persons, providing them with a minimum guaranteed income.  An SSI recipient is allowed to have $2,000 in resources.  Some resources are excluded from consideration for SSI eligibility consideration.  

Medicaid also is a means-tested program and pays for health care for those who qualify.  Its eligibility criteria are the same as for SSI and if one qualifies for SSI he or she automatically qualifies for Medicaid.

Social Security Disability Insurance (SSDI) pays benefits to people who are unable to work for a year or more because of a disability. The amount of one's benefit is based on one's work history.  SSDI is not a means-tested program.  Thus, a Special Needs Trust may be needed to protect SSI and Medicaid benefits, but it would not be needed for an SSDI recipient.

A Special Needs Trust will preserve assets for the benefit of the disabled person so that he or she can obtain government benefits, and have the trust assets available for additional comforts, enjoyment, education, entertainment and medical care not otherwise provided by the government programs.  All distributions of income and principal must be in the discretion of the trustee.  

Such trusts, then, can play an important role in a well-managed support system for the disabled person which maximizes the use of government provided services while still supporting the family’s care and enhancing the comfort of and enjoyment of life for the disabled person.

Jon


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