Supplemental Needs Trusts (sometimes called “Special Needs Trusts”) are special Trusts, authorized by the government, which allow disabled persons to protect their assets while they are receiving government benefits. For a disabled person who may have myriad needs such as a handicapped-accessible home, special clothing, transportation, food, furniture, and countless other accommodations, using up one’s assets on basic healthcare, and then becoming completely dependent on the government, can have devastating consequences for the person’s lifestyle.
There are two kinds of Supplemental Needs Trusts (SNTs). A First Party SNT is established for the benefit of a disabled person under the age of 65, using money belonging to the disabled person. A Third Party SNT is also established for the benefit of a disabled person, who can be any age, but the money in the trust comes from someone other than the disabled person. For example, an aunt or uncle might establish a Third Party SNT for their disabled niece or nephew. There are important differences between these trusts, discussed below.
First Party Supplemental Needs Trust
Disabled people under the age of 65 can gain special advantages through a First Party Supplemental Needs Trust. This type of trust can protect you from becoming ineligible for government benefits. For example, if you’re disabled and have received a sum of money through a personal injury lawsuit, an inheritance, or a gift, your receipt of these funds can and often does result in the loss of your government benefits.
Without an asset protection strategy, Medicaid will require you to use up these assets to pay for your care. Compounding this difficulty, you’ll lose any Supplemental Security Income (SSI) you may be receiving, until the entire amount is spent down to the SSI eligibility limit, currently $2,000 in assets. Transferring the money to someone else doesn’t solve the problem either – if you do, you can lose your SSI for up to three years. So that means instead of your cash windfall supplying a lifelong financial and quality of life improvement, you now have significant out-of-pocket medical expenses Medicaid used to cover, and you’ve lost income that you used to receive.
Here’s a trust strategy that provides a solution. If you are under 65 years of age and you meet additional criteria, you can have a First Party Supplemental Needs Trust set up for your benefit. With this type of trust, your own assets are used to fund the trust, and you must be under 65 years of age. By federal law, this structure will protect your assets without jeopardizing Medicaid or SSI benefits. One condition you’ll have to accept is that these are “pay back” trusts, meaning that, if anything is left in the trust after you pass on, Medicaid will be reimbursed for the cost of your care from the remaining balance.
An important legislative change recently occurred regarding this type of trust. The 21st Century Cures Act was signed into Federal law on December 13, 2016. One of the most important features of the Act is that it now allows disabled persons under the age of 65 to establish their own First Party Supplemental Needs Trusts.
Under prior law, disabled persons were not able to establish this type of trust, even if their disability was physical and their mental capacity was intact. The law required that the trust be established (with the individual’s assets) by a parent, grandparent, guardian or a court. In many cases, a parent or grandparent was not available to create the trust, leaving no recourse other than to seek the intervention of a court. Since the process of establishing a court-ordered trust is often filled with delay, frustration, and expense, this is a welcome change for individuals seeking to set up their own First Party SNT.
As of the date of this writing, New York State has not yet aligned its regulations with the changes imposed by the 21st Century Cures Act, but that is expected to occur soon.
Third Party Supplemental Needs Trust
If there are funds that are to be placed in trust for the benefit of a disabled person that do not belong to that person, there’s another variation of the strategy called a Third Party Supplemental Needs Trust. If you are disabled, and a relative or other person wants to provide money for your benefit, whether as an inheritance or as a gift, then the funds should go into the trust rather than to you directly. This will permit you to keep your government benefits.
With this trust, your age doesn’t matter, and there’s no “pay back” provision. Any person who wants to assist you financially can create this type of trust while he or she is alive, or have the trust become operative after he or she dies according to the terms of a Will. If the creator of the trust is your spouse, he or she must set it up in a Will.
Additionally, just as with most of the other trust vehicles already mentioned, a Third Party Supplemental Needs Trust gives you excellent protection against future creditors, not just Medicaid. If you end up in a lawsuit, the money is more effectively sheltered than it would be outside a trust, giving you greater peace of mind about your financial security.