This post is part of a month-long series about special needs trusts. We welcome you to contact our comprehensive settlement planning firm, Milestone Consulting, with any questions or to seek advice about whether establishing a trust is right for you.
When an injured person is looking toward settlement, they sometimes need to take action to maintain eligibility for needs-based government benefits. That’s why one of the questions we receive most often concerns special needs trusts — more specifically, which type is best.
In a nutshell, special needs trusts allow individuals to access their settlement money while remaining a beneficiary for important benefits like Medicaid and Supplemental Security Income (SSI). Federal law permits the creation of a special needs trust as an exception to the “spend down” method to provide for the needs of the disabled individual.
There are two main types of special needs trusts. Both can be funded with the individual’s assets, but each comes with its own set of guidelines.
Who is eligible: An individual who is under age 65 and classified as “disabled” by Social Security Administration and/or State Medicaid Agency standards.
Who establishes it: The beneficiary or a parent, grandparent, legal guardian, or court must establish the trust.
The conditions: The trust must contain a payback clause to reimburse the state for Medicaid benefits paid during the beneficiary’s lifetime. Upon the death of the beneficiary or upon termination of the trust, reimbursement must be made to Medicaid. The trustee is responsible for paying the last expenses of the beneficiary and then distributing the remaining trust assets in accordance with the trust agreement.
How the assets are used: Assets can only be used for goods and services provided for the benefit of the disabled individual.
As an alternative to the self-settled trust, a pooled trust can provide a cost-effective and flexible solution for managing the funds of a disabled individual.
Who is eligible: An individual classified as “disabled” by Social Security Administration and/or State Medicaid Agency standards, with no age restrictions. However, if assets are transferred after age 65, those assets may be subject to transfer penalty rules.
Who establishes it: A pooled trust must be established and managed by a non-profit entity. The grantor (individual entering into the trust agreement) must sign a joinder agreement to “join” the pooled trust. The terms of the trust are set forth in a master trust agreement.
The conditions: The trust must maintain separate accounts for each trust beneficiary, but the funds are pooled for purposes of investment management. Each separate trust account must be established solely for the disabled individual and only that individual, the individual’s parent, grandparent, legal guardian or the court may place funds in the trust. Any funds that remain in the individual’s account upon their death may be retained by the trust; those funds not retained typically must be used to reimburse the state for Medicaid assistance. After Medicaid is paid back, any remaining amount will either be absorbed by the trust, or provided to the death beneficiary, as designated in the joinder agreement.
How the assets are used: Distributions from the trust are solely for goods and services provided for the benefit of the disabled individual. Distributions are paid by the trustee directly to the provider of the goods and services to ensure they are not counted as an asset or resource for Medicaid and SSI eligibility purposes.
A special needs trust can serve as an effective tool for managing the funds of a person with special needs. Before you decide to establish one, make sure you research the rules governing Medicaid in your state, as that may affect how efficiently the trust will work in your individual situation.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).