A “Special Needs Trust” is a type of trust structured to supplement a disabled person’s quality of life without affecting that person’s eligibility for means tested programs such as Medicaid. A Third-Party Supplemental Needs Trust is just one subcategory of Special Needs Trusts, which I will discuss in this article. For information on two other types of Special Needs Trusts, see my articles on a (d)(4)(A) First Party Trust, and a (d)(4)(C) Pooled Trust.
Programs like Supplemental Security Income (SSI) and Medicaid (also known as Title XIX or Title 19) are referred to as “means tested” programs, because eligibility is based upon the disabled person’s low income and low asset level. Sadly, a disabled person can lose eligibility for means-tested programs like Medicaid and SSI if they receive a gift or inheritance that pushes their resources even one dollar over the asset limits. In Connecticut, the asset limit is $1,600 in total for Medicaid (in a skilled nursing facility) and $2,000 for SSI. Losing eligibility may not matter if the gift is enough to provide for the lifetime needs of the disabled person. Most times, however, the gift ends up being spent down rapidly on healthcare costs, and the disabled person receives no real benefit.
In the past, parents were faced with a difficult choice – give the disabled child an inheritance that will interrupt government assistance, or disinherit the disabled person. Thankfully, the government recognized this inequity and now allows some exceptions to the rules to help improve the quality of life for disabled people.
A Third-Party Supplemental Needs Trust (“Supplemental Needs Trust”) is one solution to this problem. This type of Trust is established and funded by a person who is not the disabled beneficiary - Hence the term “Third-Party.” The Trust is intended to supplement the needs that are not covered by public benefits, which is why this trust is often referred to simply as a “Supplemental Needs Trust.” There are several reasons a Supplemental Needs Trust is the preferred type of Special Needs Trusts.
First, a Supplemental Needs trust is typically created by a spouse, parent, grandparent, sibling, or just a friend. Once one person establishes the Supplemental Needs Trust, others can contribute funds to it for the disabled person’s benefit. The Trust becomes a vehicle for family members to contribute funds for the disabled person.
Second, the Trust can be funded at any time. Family members should consider setting up a Supplemental Needs Trust for a disabled person even if there is not yet a source of funding. People can fund the Trust in the future by a bequest under a Will or Trust, or a beneficiary designation on a life insurance policy or retirement fund. Of course, if funds exist now, the Trust can be funded immediately upon establishment. A Supplemental Needs Trust can also hold real estate. There is no limit to the size of the trust fund. A properly drafted Supplemental Needs Trust will protect the Trust property from claims of the beneficiary’s creditors, including the state.
Finally, a Third-Party Supplemental Needs Trust has no “payback provision.” Other Special Needs Trusts require a “payback provision.” A payback provision is a requirement that, upon the beneficiary’s death, the trust must repay the state for all amounts expended on behalf of the disabled person before the balance, if any, can go to a remainder beneficiary. Because the funds in the Third-Party Supplemental Needs Trust never belonged to the disabled person, the government is not entitled to reimbursement for Medicaid or SSI payments made on behalf of the disabled person.
Upon the disabled person's death, the assets in a Supplemental Needs Trust can pass to the donor's other descendants (children or grandchildren). Thus, the Supplemental Needs Trust provides for the disabled person during his or her life while preserving funds for other descendants in the family upon the disabled person’s death. If the donor does not have other descendants, the donor can leave the trust balance to charity after the disabled person’s death.
If you think a Third-Party Supplemental Needs Trust could be appropriate for your estate plan, contact the estate planning attorneys at Cipparone & Zaccaro, PC to discuss this option. Call (860) 442-0150 today.
