Special Needs Trusts

Your attorney has identified an important issue. If you already receive SSI and Medicaid, you probably know that these programs have strict limits for the amount of “countable” resources a recipient can own. This limit depends upon your income and the specific program you’re enrolled under, but it can be as low as $2,000. Cash is a countable resource, and receiving it could jeopardize your eligibility. The effect to your benefits depends upon what resource level applies to you, how much you received, and what other countable resources you own.

Funding a special needs trust can maintain eligibility because special needs trusts are not “countable” resources: SSI and Medicaid do not count assets in the trust when determining the trust beneficiary’s resources.

A special needs trust may be a valid option, depending upon your situation and the amount of the trust funds. However, other options may be available, depending upon your situation. For example, in cases where the amount received is relatively small, it may be better to “spend down” excess resources to purchase items you need that also are “excluded” and not counted for purposes of determining benefits eligibility. I can provide assistance to help you make an informed decision about what plan will work best for you, and can help you implement your plan.

A first-party special needs trust is funded with money belonging to the trust’s disabled beneficiary. For example, trusts funded with proceeds of settlement agreements between a disabled plaintiff and a defendant are considered first-party trusts.

A third-party special needs trust is funded with money given by a person other than the trust’s beneficiary. For example, a parent could establish and fund a trust for the benefit of his disabled child. Because the parent is giving money directly to the trust rather than to the child, the trust is considered a third-party trust.

Trusts funded by money belonging to the disabled person (first-party trusts) are reviewed and approved by Social Security and Medicaid. The various requirements applicable to first-party special needs trusts are too complicated to explain completely, but this answer provides an overview of some important features. The trust has to be for the disabled person’s “sole benefit,” which Social Security defines as “the trust benefit[ting] no one but that individual [the disabled beneficiary], whether at the time the trust is established or at any time for the remainder of the individual’s life.” At death, funds remaining in trust must be used to “pay back” any state that has provided Medical Assistance to the trust beneficiary at any time during the beneficiary’s life. Except for pooled trusts (discussed below), first-party special needs trusts can be established only for beneficiaries under age 65.

In order for a first-party special needs trust not to be a countable resource, its beneficiary can’t have control over the trust. For example, a trust will be countable if it gives the beneficiary the right to terminate the trust or to direct how the trust’s funds will be spent. For this reason, special needs trusts usually give trustees almost total discretion in deciding whether to make or not make distributions for the benefit of the disabled beneficiary.

Generally speaking, benefits agencies evaluate third-party trusts to see what the trustee is required to distribute to the beneficiary, or what the beneficiary has the legal right to demand.

If the trust requires the trustee to make distributions to support the beneficiary or pay for the beneficiary’s medical care, then benefits agencies likely would consider the trust to be an available resource. However, trusts that require trust funds to be used only for items not provided under public benefits programs generally are found not to be countable resources. Third-party trusts are not subject to the sole benefit and payback requirements.

In order for a third-party special needs trust not to be countable, its beneficiary can’t have control over the trust. For example, a trust will be countable if the trust gives the beneficiary the right to direct how the trust’s funds will be spent, or to the extent that the beneficiary has the legal right to force the trustee to make distributions. For this reason, third-party special needs trusts usually give trustees almost total discretion in deciding whether to make or not make distributions for the benefit of the disabled beneficiary.

A pooled trust is a trust in which assets of different beneficiaries are pooled together for purposes of investment and management. Investment managers and trustees usually are interested mostly in “big money.” Pooling different people’s resources together allows people with more modest amounts of money to use trusts.

Generally speaking, a pooled trust is established by a party who is interested in serving as trustee of the trust. The party establishing the pooled trust drafts and executes a “master trust agreement”; its terms will apply to all of the pooled trust’s beneficiaries. People who want to use the trust each sign individual contracts with the trustee to establish their share in the pool. Although the assets are managed as a pool, the trustee provides statements for each beneficiary’s sub-account and, generally speaking, uses the money in the account to benefit only that particular beneficiary.

First-party pooled special needs trusts have some unique features that are different from other first-party special needs trusts. Under federal law, first-party pooled special needs trusts must be established and managed by a non-profit. Also, as an alternative to payback, first-party pooled special needs trusts may be drafted so to retain funds remaining in a beneficiary’s account at the beneficiary’s death rather than providing for payback. Trusts that use this option specify it in their master trust agreement. In Pennsylvania, there is no legal limit to the amount of funds a first-party pooled special needs trust can retain without payback. Funds retained by the non-profit usually are used to benefit either the pooled trust’s other beneficiaries or other disabled people generally.

Distributions from a special needs trust can affect a beneficiary’s eligibility for benefits, depending on how they are made. Rules to avoid affecting a beneficiary’s benefits get very complex depending on the situation and this answer provides a general discussion of some of the highlights.

Money that a special needs trust pays directly to the beneficiary generally is counted as unearned income to the beneficiary and can interfere with the beneficiary’s eligibility for benefits. For this reason, special needs trustees usually make trust distributions by paying other parties to provide goods and services for the beneficiary. For example, a trustee could purchase a couch for a beneficiary by paying the furniture store directly (rather than giving the beneficiary money to purchase the couch). Benefits programs usually do not count payments to third parties as income to the trust beneficiary, even when the payments result in the beneficiary receiving something of value.

Rules adopted by Social Security in 2018 also allow trustees to use “administrator-managed prepaid debit cards” to make distributions. The card is issued to the trust beneficiary. The trustee loads money onto the card, and controls use of the card by limiting where it can be used or what types of items it can be used to purchase. For example, the trustee could prohibit the card from being used to make cash withdrawals, which could negatively affect a beneficiary’s benefits eligibility.

Items a beneficiary receives as a result of trust distributions can be countable resources which can affect the beneficiary’s eligibility for benefits. Benefits programs usually have lists of resources which are excluded for purposes of determining the recipient’s resources. Special needs trustees are careful to purchase excluded items rather than items which the benefits program will count as a resource.

If a beneficiary receives SSI, distributions made to third parties that result in the beneficiary’s receiving food and/or shelter can reduce the beneficiary’s SSI income. Sometimes these distributions still are advantageous to make, if the value of the support the beneficiary receives from the trust is greater than the reduction in benefits received.