Planning for a Disabled Loved One

What is the difference between a special needs trust and a supplemental benefits trust?  If you have a family member who suffers from a disability, the answer to this question can be quite important.

A great number of people suffer from a disability.  Many of these individuals receive means-tested government benefits, such as Medicaid (the federal medical assistance program) or Supplemental Security Income (the federal cash assistance welfare program).  When a program is “means-tested” it means that a person’s assets and income affect his eligibility for the program.

For instance, both Medicaid and SSI have a $2,000 resource limit.  If the beneficiary’s assets exceed $2,000, he will be determined to be ineligible for the program.  For a person with a disability who has significant medical expenses, ineligibility for Medicaid could have devastating effects.

Certain trusts can assist a Medicaid beneficiary in maintaining his eligibility for the program.  A trust is an agreement pursuant to which one person, called the trustee, manages and invests the assets of the trust for the benefit of the trust’s beneficiary.

The terms of a trust can vary greatly.  Many people who come to see me talk as if there is one trust with one set of terms, but the reality is, the person who creates the trust, called the grantor, is free to establish the terms of the trust.

When it comes to Medicaid, it is important that the terms of the trust do not mandate the availability of the trust’s asset to the beneficiary.  The trust must be drafted as what is commonly known as a wholly discretionary trust.  A wholly discretionary trust is a trust the terms of which permit the trustee complete discretion in making distributions of assets and income to the trust’s beneficiary.

For instance, the terms of the trust might say, “My trustee has sole and complete discretion in making distributions of principal or income to the trust’s beneficiary.”  While the trust agreement could say that the trustee is take into consideration certain circumstances that are occurring in the beneficiary’s life (for instance, his need for dental care), the dispositive terms of the trust leave the obligation to make a distribution of principal or income at the sole and absolute discretion of the trustee.

Both a supplemental needs trust and a special needs trusts are wholly discretionary trusts designed to maintain a Medicaid beneficiary’s eligibility for benefits.  The difference between the two trusts is that a supplemental benefits trust is typically funded with the assets of a person other than the trust’s beneficiary (such as the beneficiary’s parents) whereas a special needs trust is typically funded with the assets of the trust beneficiary (that is, the disabled person’s assets).

Also, a special needs trust must contain a “payback provision.”  Because the assets in the trust are the assets of the Medicaid beneficiary, any money left in the special needs trust must first go to the state to payback the state for any Medicaid benefits it paid during the beneficiary’s life.  With a supplemental needs trust, because the money did not belong to the Medicaid beneficiary (for instance, it belonged to his parents), no payback is required.

Finally, a special needs trust must be established before the Medicaid beneficiary attains the age of sixty-five.  A supplemental benefits trust can be established at any age, because once again, the money was never the money of the beneficiary, so the government has no interest in substantially restricting the creation of a supplemental benefits trust.