Special Needs Planning

Special care and planning are necessary for disabled individuals, especially if they receive need-based public benefits such as Medicaid or SSI. It is possible to include our disabled loved ones in our estate planning, but we must ensure that their benefits are not jeopardized as a result of receiving inheritance. We commonly use a Special Needs Trust in these situations.

A Special needs trust is a unique type of trust that allows the disabled Beneficiary to use assets without affecting his eligibility for benefits. The Trust assets are not considered to be owned by the Beneficiary because the Trustee has absolute discretion as to how the assets can be used. Of course, the Trustee can only use the Trust assets for the Beneficiary, but the Beneficiary has no personal access to the Trust assets. The Trustee should not pay Trust money directly to the Beneficiary, as that could lead to a reduction in SSI. The Trustee also should not use Trust assets to supplant any public benefits. For example, if the Beneficiary receives a monthly stipend to pay his heating bill, the Trustee cannot use Trust money to pay the heating bill instead. However, the Trustee can and should use the Trust assets for supplemental needs, such as extraordinary medical costs not covered by Medicaid, a new vehicle, or leisure items such as tickets to a sporting event. In some cases, the Trustee can even purchase a house for the disabled Beneficiary.

A Special Needs Trust must be administered correctly or the Beneficiary’s necessary benefits could be affected. Therefore, it is very important that the Trustee be someone who is financially responsible and willing to take on this important role. Ideally, the Trustee should be a professional trust company with experience in Special Needs Trusts. However, this is not always possible as most trust companies have minimum requirements as to the value of the Trust. When the Special Needs Trust does not meet those minimum requirements, the Trustee should be a family member or close friend who has a close relationship with the disabled Beneficiary and intimate knowledge of his special needs.

There are three types of Special Needs Trusts: 1. First Party, 2. Third Party, and 3. Pooled. A First Party Special Needs Trust is funded with the disabled Beneficiary’s assets. In Pennsylvania, there is a Medicaid payback when the Beneficiary dies or if the Trust is terminated. This means that any assets remaining in the Trust will be paid to the Pennsylvania Department of Human Services in repayment of Medicaid benefits paid out for the Beneficiary. First Party Special Needs Trusts are used when a disabled person unexpectedly receives an inheritance (and proper planning was not done) and also to hold judgment or settlement proceeds that were received through a personal injury action.

A Third Party Special Needs Trust is funded with third party assets – not from the disabled person. A Third Party Special Needs Trust is most often used in estate planning as a way of “catching” inheritance for a disabled loved one, without affecting eligibility for public benefits. There is no Medicaid payback in a Third Party Special Needs Trust. When the Beneficiary dies, the contingent Beneficiaries receive the Trust assets.