Special Needs Trust: The Importance of Getting it Right

By: C. Arthur Robinson, II

It is commonplace today that most families either have knowledge of or may even have a family member who is a special needs individual. Special needs individuals, whether by virtue of a physical disability or mental disability, are often entitled to certain means tested benefits, most especially social security income disability income and Medicaid.

These benefits are means tested and therefore an individual who would otherwise qualify but whose asset posture is above a very minimal $2,000 in countable assets can be disqualified from these public benefits as a result of the means test. Often, in such a situation it is possible to provide for such an individual without making assets that are otherwise allocated for their benefit becoming countable and disqualifying them from the means tested benefits.

The hows and whys of providing for disabled individuals are dependent upon the source of the property.  In the case where a family member wants to provide for a benefit to a disabled individual, it is commonplace to use a third party special needs trust. Such a trust is created with assets of someone other than the disabled individual and the trust should be very specifically designed to provide only supplemental benefits and for supplemental needs so that a general beneficiary designation does not disqualify the individual for benefits.

A properly drafted third party special needs trust typically provides for supplemental benefits. In addition the creator of the trust who must be someone other than the disabled individual and who must use assets which are not allocated to the disabled individual can also have other provisions that provide for downstream benefits to other family members.

In contrast it is possible under some circumstances, typically by virtue of a court order, to create a first party special needs trust which will enable assets which are allocated to or are owned by the disabled individual to be used to provide for their supplemental needs.

 A first party special needs trust which is authorized specifically under the federal law enabling Medicaid can be created and assets which are housed within the first party special trust will not disqualify an individual from means tested benefits. In the case of the first party special needs trust however, there are specific requirements with respect to the disposition of any assets in such a trust after the death of the disabled individual. Specifically, such trusts need to provide for appropriate payback provisions in order to be an authorized first party special needs trust.

When such a trust is properly set up, again the individual who has the supplemental beneficial interests from the trust, will be able to qualify for and receive publicly provided means tested benefits without the property, which is held in trust for their benefit, interfering with the provision of benefits. These trusts can and should be used whenever a disabled individual receives property or when a disabled individual who is a family member is being provided for as part of appropriate estate planning for a parent or other relative.

Careful attention to the necessary details with respect to this planning can result in significant public benefits being available for an individual while preserving the ability to provide supplemental care and other benefits in their behalf. We at Wolcott Rivers Gates are very familiar with this landscape and can assist you in creating such a trust.