Supplemental Needs Trusts (also called Special Needs Trusts) have become fairly popular in recent years. These trusts are designed to protect a disabled person’s assets in order to ensure the greatest amount of funds available for care and support. In 1993, Congress passed legislation in 42 U.S.C. § 1396 et seq. that specifically allows a disabled person to exempt assets from public aid determinations. You can click here to read more about how the government treats these unique trusts. One look at the complex federal regulations that control these trusts should be reason enough to consult an experienced elder law attorney to find out if it is right for your situation.
How much money can a disabled person keep and still be eligible for public aid?
In general, for a person to qualify for Medicaid, he or she must be impoverished. This means having less than $2000 in personal assets. Previously, there were fairly strict provisions that made it difficult for a disabled person to keep assets and still qualify for Medicaid funding of long-term care. Nursing home and rehabilitation costs can be exceedingly expensive, and people are often concerned that a disabled family member could quickly spend all of their assets on care and support before qualifying for government assistance.
How does a Supplemental Needs Trust help protect assets?
While there are many complex laws that govern this area, as a general rule, the law allows 2 types of these trusts: “Self-settled” and “Third-party.”
1. Self-settled Supplemental Needs Trusts
A self-settled trust is one that is funded with the disabled person’s own assets. This is common where the disabled person perhaps receives a settlement in a lawsuit or had a sizable net worth prior to becoming disabled. In these cases, Medicaid may have certain limitations on how the funds are used, and generally upon the death of the disabled person, his or her estate will have to “pay back” Medicaid for any public aid paid on his or her behalf. Therefore, if years of care are provided, there may not be much left to distribute to heirs. The goal of these trusts is not to preserve an inheritance so much as it is to provide for the well being of the disabled person for life.
2. Third-party Supplemental Needs Trusts
A third-party trust is one that is funded with somebody else’s assets. This is common where a family member leaves an inheritance to the trust or places personal assets in the trust for the disabled person. There are many creative ways for an elder law attorney to arrange this. The greatest difference between this and a self-settled trust is that these are not readily available to the disabled person. Indeed, someone else is the primary beneficiary and acts as trustee, thereby giving someone else control over the use of the funds. Some parents of disabled adult children choose to establish these trusts and name another child to act as trustee. This way, following their death, they can be confident that their other children will have the necessary assets to take care of their disabled sibling, while permitting the disabled sibling to receive public benefits.
Despite these clever estate planning tools, there are many exceptions and limitations on the use of trust funds that require an attorney’s careful review. Naturally, no plan is 100 percent foolproof; all trusts come with their own unique pros and cons depending on your own circumstances.