As an elder law attorney, I am often asked by a parent of a
disabled child “How can I provide for my child’s financial needs when I
am no longer alive?” People are concerned that, by leaving an
inheritance directly to their disabled child, this will usually
disqualify the child from most means tested public assistance programs.
If the parents make an outright gift to another sibling can they be
assured that this child will properly look after the disabled child?
The solution to the problem is to create a trust known as a
“supplemental needs trust” for the benefit of the disabled child. The
purpose of the trust is to preserve eligibility for public assistance
programs, such as Supplemental Security Income (SSI). In most states,
eligibility for SSI automatically creates eligibility for Medicaid,
which may be the only health insurance the disabled child is able to
receive. In addition to maintaining public assistance eligibility,
assets held in the supplement needs trust may be used to substantially
improve the disabled child’s quality of life by providing goods and
services above those provided by federal and state agencies.
There are two main types of trusts. The third party
"supplemental needs trust" and the self-settled "special needs trust."
The third party supplemental needs trust is a trust which is usually
created with the assets of a parent or grandparent for the benefit of
the disabled child. The trust may be created while the parent is alive
or at death through a testamentary trust under the parent’s will or
revocable trust. As long as the child cannot revoke the trust or compel
distributions, assets held in the trust will not be considered an
available resource and will not disqualify the child from receiving
public assistance.
During the child’s lifetime, depending on the laws of your
particular state, the trustees may be granted broad discretionary
authority to use trust assets to purchase goods and services not
otherwise available from governmental programs. These may include
supplemental medical, dental, diagnostic work and treatment, nursing and
attendant care, travel and entertainment, supplemental housing, support
and transportation. In drafting the trust, the attorney will have to
take into consideration both federal and state law. In some states the
mere existence of the trustee’s ability to use trust assets to provide
food, clothing or shelter will disqualify the child from receiving
public benefits. However, in other states direct payments to third
parties for food, clothing or shelter known as "in-kind support and
maintenance" will only cause a reduction in the disabled child’s SSI for
the month.
Upon the death of the disabled child, assets held in the
third party supplemental needs trust may pass to other family members
and the trust is not required to reimburse the state for public
assistance furnished to the disabled child under the state’s Medicaid
program.
What happens when a parent fails to create a supplemental
needs trust, during lifetime or at death, and the disabled child
receives their inheritance outright, or the child receives funds as a
result of a personal injury award? Fortunately, all is not lost. Under
the Omnibus Reconciliation Act of 1993 ("OBRA ‘93") Congress
specifically authorized the transfer of assets to a self-settled special
needs trust, also known as a "1396p(d)4(A) trust," as a means of
preserving public benefits. Under OBRA ‘93, the trust must be funded
with the assets of a disabled individual under 65 years of age, by a
parent, grandparent, legal guardian or the court. As with the third
party supplemental needs trust, the trustee may be granted authority to
provide benefits over and above those provided by public or private
financial assistance.
The major drawback to the self-settled special needs trust is
that, at the death of the beneficiary, the state will have to be
reimbursed for Medicaid benefits provided to the disabled child prior to
distribution of trust assets to other family members.
In choosing a trustee to administer the trust, the family
should consider the size of the trust assets, the financial ability of
the individual and the expected duration of the trust. Where the assets
of the trust are small the appointment of a family member who has some
investment experience to serve as trustee may be the only practical
solution. However, where the assets of the trust are substantial and the
trust is anticipated to last for twenty or thirty years, the appointment
of a corporate trustee to serve along with other family members is
preferable.
Whether the trust is created as a third party trust or a
self-settled trust the advantages are many. The disabled child is able
to secure immediate eligibility for public assistance such as SSI or
Medicaid. While on Medicaid, the child is able to obtain services at
significantly lower cost than the private pay rate. Some programs and
services are only available through the Medicaid program. Even if the
state Medicaid program has to be reimbursed once the trust is
terminated, the availability of public assistance will permit the funds
held in the trust to go further in improving the child’s quality of
life.
The attorney who drafts the supplemental needs trust must
take into consideration a broad range of both public and private benefit
programs, including Supplemental Security Income (SSI) and Medicaid, as
well as income, gift and estate taxes issues. In addition to peace
of mind, the greatest flexibility is achieved when the trust is set up
by a parent or other third party either during lifetime or at death,
rather than passing the funds on to the disabled child. As in many
endeavors, the most successful outcome is achieved by planning ahead.
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