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Special needs trusts: Not just for the needy

If you have a child or other family member with a disabling condition requiring long-term care or that prevents them (or will prevent them) from being able to support themselves, consider establishing a special needs trust (SNT). Also known as a supplemental needs trust, an SNT allows you to enhance a family member’s quality of life without jeopardizing his or her eligibility for government benefits, such as Medicaid or Supplemental Security Income (SSI).

SNT primer

The costs of long-term care for a disabled family member can be enormous and aren’t always predictable, and these costs can endanger your family’s financial future. An SNT preserves your loved one’s access to government benefits that cover health care and other basic needs, provides funds for other important needs, and serves as a safety net against unexpected expenses.

Medicaid and SSI pay for basic medical care, food, clothing and shelter. To qualify for these benefits, however, a person’s resources must be limited to no more than $2,000 in “countable assets.” Generally, every asset is countable except:

• A principal residence, regardless of value (but if the recipient is in a nursing home or similar facility, he or she must intend and be expected to return to the home),
• A car (which may be subject to value limits),
• A small amount of life insurance,
• Burial plots or prepaid burial contracts, and
• Furniture, clothing, jewelry and certain other personal belongings (which may be subject to value limits).

An SNT is an irrevocable trust designed to supplement, rather than replace, government assistance. Generally, the trust is funded by someone other than the beneficiary, though in certain instances a beneficiary’s assets may be used to fund the trust. (See “Dealing with countable assets” on page 3.)

To preserve eligibility for government benefits, the beneficiary can’t have access to the funds, and the trust must be prohibited from providing for the beneficiary’s “support.” That means it can’t be used to pay for medical care, food, clothing, shelter or anything else covered by Medicaid or SSI, such as the basic medical care provided by those programs.

With those limitations in mind, an SNT can be used to pay for virtually anything government benefits don’t cover, such as unreimbursed medical expenses, education and training, transportation (including wheelchair-accessible vehicles), insurance, computers, and modifications to the beneficiary’s home. It can also pay for “quality-of-life” needs, such as travel, entertainment, recreation and hobbies.

Keep in mind that the trust must not pay any money directly to the disabled individual. Rather, the funds should be distributed directly – on behalf of the beneficiary – to the third parties that provide goods and services to the beneficiary.

Instead of establishing an SNT, some people “disinherit” the disabled family member and leave extra assets to a sibling or other relative who will be responsible for his or her support. This strategy is risky, however, because there’s no legal obligation to use the assets for the disabled person’s care, and the assets may be vulnerable to creditors’ claims.

Careful drafting required

To ensure that an SNT doesn’t disqualify the beneficiary from government benefits, it should prohibit distributions directly to the beneficiary and prohibit the trustee from paying for any support items covered by Medicaid or SSI. Some SNTs specify the types of supplemental expenses the trust should pay; others give the trustee sole discretion over nonsupport items.

Like many trusts, most SNTs contain spendthrift language to protect the trust assets against creditors’ claims. Also, in some states, it may be necessary to include specific language providing that the trust is an SNT, that the funds are intended for only nonsupport purposes and that your intention is to preserve the beneficiary’s eligibility for government benefits. In other states, simply designing the trust as a discretionary trust may be sufficient, but it can’t hurt to include SNT spendthrift language just to be safe.

Dealing with countable assets

What if your disabled family member already owns more than $2,000 in countable assets? An SNT is useless if the beneficiary is otherwise ineligible for government assistance.

One solution is a Medicaid payback trust — an irrevocable trust established by the disabled person (or by court order) to pay for permitted supplemental needs during his or her lifetime. When the disabled person dies, any remaining trust assets are used to reimburse the government for Medicaid benefits provided to the beneficiary, with any excess assets going to the trust’s remainder beneficiaries.

Communication is key

If you establish an SNT, communicate your plans to everyone concerned. Otherwise, well-meaning relatives or friends might inadvertently undermine your strategy by making gifts or bequests directly to the special needs person. Let them know that the best way for them to help is to make gifts or bequests to the SNT.
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