Special needs trust

How do you best support a family member with a disability?  Consider setting up a Special Needs Trust.

First, a little background.  Many people with a disability qualify for government benefits in the form of SSI (Supplemental Security Income) or Medicaid.   However, both of these programs are awarded on a “need” basis, meaning the person can only qualify for the program if he or she has limited assets and income.

For those people who qualify, SSI and Medicaid are essential to pay for their living and medical expenses.  However, these benefits provide only for the bare minimum.  They do not allow for a lot of extras in life. Enter the special needs trust.

What is a Special Needs Trust?

Essentially, special needs trusts are used to protect the SSI and Medicaid eligibility of a person with a disability, while providing that person with additional funds for luxuries they otherwise could not afford. The assets held in a special needs trust are not counted against the disabled beneficiary for the purposes of determining whether he or she is eligible for benefits.  So a disabled individual can actually have the benefit of much more money for quality of life purposes and still keep his or her government benefits.

How a Special Needs Trust Works

Special needs trusts can be established only for individuals who are under 65 years of age and have a disability as determined by the Social Security Administration.  Creation of the special needs trust then depends on whose money is going into the trust.

There are two types of Special Needs Trusts: First Party and Third Party.

First Party Special Needs Trust

If a person with a disability has his own assets and needs to qualify for Medicaid, he can create his own First Party Special Needs Trust.  He can also create his own trust if he is already on Medicaid and he receives an inheritance from someone, or if he receives a personal injury recovery, and those assets would disqualify him for public benefits.

Alternatively, a parent, grandparent, or guardian may establish the trust for the person with the disability, using that person’s own assets, or a court may order the creation of the trust on behalf of the disabled person.  It is a great option, but it comes with one disadvantage: any money left in the trust at the beneficiary’s death must be used to repay state Medicaid agencies for the public benefits received from the agency.

Third Party Special Needs Trust

If someone else creates a Special Need Trust for a disabled person and does not use the disabled person’s money to fund it, then that is known as a Third Party Special Needs Trust.  The Trust can be funded with assets immediately, or through a beneficiary designation in a will, a trust, or in life insurance.   An added advantage of these trusts is that there is no Medicaid pay-back requirement; the trust creator can designate who is to receive any leftover money in the trust after the disabled beneficiary’s death.

There is a third option – for the person with a disability is to put the money in what is called a “pooled special needs trust.”  These are large trusts run by government-approved entities in which the money of multiple individuals is pooled together for investment and administrative purposes, but each beneficiary has a separate sub-account which is run as a special needs trust for that person.  In Texas, the ARC of Texas is the most well-known of these programs.  First-party pooled trusts do require Medicaid pay-back after the beneficiary’s death, but third-party pooled trusts do not.  This option is attractive because the beneficiary gets the benefit of professional trustees administering the special needs trust, with a fairly low required minimum deposit into the trust.

Advantages and Disadvantages of a Special Needs Trust

Each state administers its own Medicaid program and has its own requirements for what qualifies as a special needs trust, and what distributions are acceptable.  In fact, there are very strict rules on what the funds in the trust can be used for.  Generally, the trust money must be used to “supplement, not supplant” payments by the government, which means that the trust cannot be used to pay for things that are provided through government programs.  Most notably, the trust payments cannot pay for food or shelter for the trust beneficiary, and it cannot distribute cash or gift cards to the beneficiary.  Running afoul of either the qualifications to establish a special needs trust, or the restrictions on distributions, will cause the individual to lose SSI and Medicaid eligibility.  But a properly established and administered trust can provide for clothing, transportation, travel, entertainment, upgrades in living conditions, and more to better the life of the individual with special needs.

Hammerle Finley Law Firm Can Help

When questions about special needs trusts in Texas arise, it can be very beneficial to have a knowledgeable Hammerle Finley special needs trust attorney. If you are in need of an attorney in the Dallas or Lewisville area, fill out our contact us form online for a free assessment or call (972) 436-9300 for a consultation.