If you have a loved one with special needs, you may wonder how to provide for their future without jeopardizing their eligibility for government benefits. One option that can help you achieve this goal is a special needs trust, also known as a supplemental needs trust. But, would a special needs trust interfere with government benefits?
What is a special needs trust?
A special needs trust is a legal arrangement that allows a person with disabilities to receive funds from a third party (such as a parent, grandparent or friend) or from their own assets (such as an inheritance, lawsuit settlement or retroactive Social Security payment) without affecting their eligibility for public assistance programs, like Supplemental Security Income and Medicaid. These programs have strict income and asset limits that can disqualify a person with disabilities from receiving benefits if they have more than $2,000 in countable resources.
A special needs trust is designed to supplement, not replace, the benefits provided by the government. The trust funds can be used to pay for expenses that are not covered by public assistance, such as education, recreation, transportation, personal care, clothing, furniture and other items that enhance the quality of life of the person with disabilities. The trust funds cannot be used to pay for basic necessities, such as food and shelter, as this would reduce the amount of SSI and Medicaid benefits. The two types of special needs trusts in Maryland are first-party trusts and third-party trusts.
A first-party trust is established with the assets of the person with disabilities, either by themselves (if they are competent), their parent, grandparent, guardian or the court. It must include a provision that upon the death of the beneficiary, the state will be reimbursed for the Medicaid benefits paid on their behalf.
The first-party trust can be either a stand-alone trust or a pooled trust. A stand-alone trust is managed by an individual trustee appointed by the grantor or the court. A pooled trust is managed by a non-profit organization that pools the funds of multiple beneficiaries for investment purposes and maintains separate accounts for each beneficiary.
A third-party trust is established with the assets of someone other than the person with disabilities, such as a parent or other relative. A third-party trust can be created during the lifetime of the grantor (inter vivos trust) or upon their death (testamentary trust). A third-party trust does not have to include a payback provision to the state and can name other beneficiaries to receive the remaining funds after the death of the disabled person.