President Obama signed into law an amendment to the special needs trust that permits a competent disabled individual to establish his own special needs trust. The National Academy of Elder Law Attorneys (NAELA) lobbied very hard for this amendment to the law.
A special needs trust is an irrevocable discretionary trust that permits a disabled individual to receive needs-based government benefits, such as Medicaid or Supplemental Security Income, while still having the benefit of his money that is being held in the trust. A federal statute that is part of the federal Medicaid Act authorizes the creation of special needs trusts.
As with many issues affecting an individual’s Medicaid eligibility, I like to explain how a special needs trust works by way of example. Assume that Mr. Smith, aged forty-five, is involved in a car accident. As a result of the accident, Mr. Smith is rendered totally and permanently disabled. His medical bills exceed his health insurance limits (assuming he has health insurance) and his assets are depleted paying for his medical expenses.
Eventually, Mr. Smith qualifies for Medicaid benefits. Medicaid is a federal-state health payment program for needy individuals. Because Mr. Smith is now destitute and in need of medical assistance on a regular basis, Mr. Smith qualifies for Medicaid benefits.
Several years after his accident, Mr. Smith receives an award from a personal injury lawsuit. Mr. Smith sued the driver who caused the car accident that caused his injuries, and he settles the lawsuit several years after the accident.
In the settlement, Mr. Smith receives compensation for his injuries of $400,000, after paying all of the costs and expenses associated with the lawsuit. Since Medicaid has an asset limit of $2,000, Mr. Smith’s award of $400,000 puts him significantly over the asset limit for Medicaid eligibility.
If Mr. Smith were simply to retain the $400,000, he would be disqualified for Medicaid benefits. Since Mr. Smith is totally and permanently disabled and has many, continuing medical expenses associated with his injuries, the $400,000 he received from the lawsuit would—absent planning—be consumed by medical expenses. After Mr. Smith spent the $400,000, he could re-qualify for Medicaid benefits.
From a practical standpoint, this would mean that Mr. Smith received no benefit whatsoever from the lawsuit settlement. The settlement would be used to pay for the medical care and services that the Medicaid program would have paid absent the award from the lawsuit.
In 1993, the special needs trust statute was specifically put in place to avoid such a result. A special needs trust permits Mr. Smith to transfer his $400,000 into an irrevocable trust, to continue to receive the benefits of the money in the trust for his use, and to continue to receive Medicaid benefits. Mr. Smith has the best of both worlds—the use of his money from the lawsuit for his needs and the benefits of the Medicaid program.
In order to establish a special needs trust, Mr. Smith must be under age sixty-five. In my example, let’s assume he’s forty-eight at the time he receives the settlement of $400,000. Mr. Smith must also be disabled; in my example he is.
The special needs trust must contain a payback provision. What this means is that if Mr. Smith dies and if any of the $400,000 remains in the trust at the time of his death, then the money that remains will go to the State in order to reimburse the State for any Medicaid benefits the State paid on Mr. Smith’s behalf during Mr. Smith’s life. Assuming the State were reimbursed in full and money still remained in the Trust, the excess money could pass to Mr. Smith’s family.
And, until a few days ago, the Trust had to be established by a parent of Mr. Smith, a grandparent of Mr. Smith, Mr. Smith’s court-appointed guardians, or a court. Note that Mr. Smith could not establish his own trust. What the change in the law permits is Mr. Smith to establish his own trust, if Mr. Smith is competent to establish his own trust. If Mr. Smith is not competent, then the trust must be established by Mr. Smith’s parent, grandparent, guardian (if any), or a court.
Laws affecting individuals with disabilities are often complex, and even small legislative changes can have significant consequences. Understanding how a new special needs trust law fits into an overall planning strategy can help families make informed decisions while continuing to protect important benefits and resources.