Judith A. Jarashow
Attorney At Law

Special Needs Beneficiaries

Planning for disabled family members requires special planning.

Planning for disabled family members requires special planning to ensure that the individual’s eligibility for government benefits such as Medicaid and Supplemental Security Income (SSI) are not lost.

There are various estate planning options for beneficiaries with special needs. If the assets are coming from third persons and do not belong to the beneficiary, the best approach is to establish a supplemental needs trust. This is a discretionary trust that allows the maximum amount of flexibility for the trustee to meet the needs of the disabled beneficiary without jeopardizing eligibility for Medicaid and SSI. If planning is not done correctly, significant problems can develop. Outright gifts to a disabled person will disqualify him or her from receiving government benefits. Having property owned by another with the “understanding” that it is meant to be used to support the disabled person raises innumerable potential problems. A support trust, as opposed to a supplemental needs trust, will usually disqualify an individual from receiving government benefits.

Supplemental needs trusts can be either revocable or irrevocable, giving the trustee complete discretion over the distribution of trust assets for the beneficiary. The trust is designed to adapt to changes in laws related to the funding and eligibility requirements for government benefit programs. In addition, even if the person does not receive/plan to receive either Medicaid or SSI, a supplemental needs trust can protect the disabled person from creditors or someone who may try to take advantage of them.

The primary function of a special needs trust is to allow the trustee to use trust funds to supplement government benefits and provide the disabled person with extra things not provided for by such benefits in order to give them a higher quality of life. It is important that the trustee not make payments of cash directly to the beneficiary, as such distributions do not “supplement” government benefits and could result in disqualification.

Family members should be made aware that an individual has a supplemental needs trust when making their own estate plans. Instead of making gifts outright to the individual (whether it be an inheritance, retirement benefits, life insurance, real estate or any other asset), the gift should be made to the supplemental needs trust.

If a disabled individual already owns property and wants to qualify for Medicaid and SSI, two specific types of supplemental needs trusts may be used to convert the property into non-countable assets for purposes of the government benefit programs. These are the Medicaid Payback Trust (or (d)(4)(A) trust) and Community Pooled Account Trust (or (d)(4)(C) trust). Medicaid Payback Trusts are irrevocable and established for the benefit of the individual during his or her lifetime. At the beneficiary’s death, Medicaid must be reimbursed for any benefits provided for during the beneficiary’s lifetime, with the remainder of the property passing to the trust’s remainder beneficiaries (usually family or friends). In order to establish a Medicaid Payback Trust a person must be under age 65 at the time the trust is established and meet the Social Security definition of “disability”.

The second type of trust is the Community Pooled Account Trust, a master trust created and administered by a non-profit charitable organization. A sub-trust account is established with the master trust for special needs person who, again, must meet the Social Security “disability” definition and, depending on the state, may or may not have to be under 65. Disqualifying assets are placed into the sub-trust account within the master trust, and the charity, the trustee of the master trust, pools all of the sub-trust accounts for purposes of managing investments. The charity is permitted to make distributions for the supplemental needs of the individual, and often with pooled trusts, family members or friends serve as “trust advisors” to make sure the beneficiary’s needs are met. At the time of the beneficiary’s death, trust property is used first to either reimburse Medicaid or is kept by the charity, and then, if any assets remain, property is distributed to the remainder beneficiaries. Community Pooled Account Trust are optimal when the amount of assets owned by the special needs individual are not so large as to warrant establishing an individual Medicaid Payback Trust. Also, laws regarding Community Pooled Account Trust vary from state to state, and some states do not allow their creation.

There are many potential scenarios in which a supplemental needs trust might be used. One common application of this form of estate planning involves the person who, having suffered a permanently disabling personal injury caused by another, receives a substantial settlement or judgment. Because the settlement or judgment would be provided directly to the disabled person, they should establish a Medicaid Payback Trust into which the funds will be placed. This way, despite the large settlement, the person will be able to qualify for government benefits, and then, upon their death, Medicaid will be paid back from any remaining trust assets. However, family members and friends need to be aware that when creating their own estate plans gifts or bequests should not be made directly to the disabled person or to their Medicaid Payback Trust. Gifts or bequests directly to the person may be considered countable assets which would disqualify the person from Medicaid and SSI. At the same time, gifts or bequests to the Medicaid Payback Trust, while not disqualifying the person from receiving benefits, if still in the trust at the time of the individual’s death will be used to payback Medicaid. To avoid this outcome, family members and friends should establish a new trust, a third party trust, with the disabled person as a beneficiary. Assets in a correctly established third party trust will not be treated as countable assets for purposes of Medicaid or SSI qualification and, additionally, unlike the Medicaid Payback Trust, cannot be used to reimburse Medicaid upon the death of the disabled person. As a result, family members and friends can be assured that their loved ones will be provided for during their lifetime without having to fear that assets will subsequently pass to the government as opposed to other named beneficiaries. This demonstrates the levels of planning involved with supplemental needs trusts, as well as the importance of making others aware of the correct way to do their own planning.