Special Needs Trusts – Whose Money is in there?

The term “Special Needs Trust” typically refers to a “first party trust,” funded with assets that belong to a person under 65 who has disabilities. Federal law for the Medicaid and SSI programs  — 42 USC 1396p(d)(4)(a) and 42 USC 1382b(c)(C)(ii) –allows an applicant to transfer their excess resources into a Special Needs Trust without being disqualified for benefits. The NJ Medicaid regulations with the requirements for these Trusts are at N.J.A.C. 10:71-4.11(g).The Trust would be established by the applicant’s parent, grandparent or by a court, and would usually be funded before the application is filed. However, if a Medicaid or SSI recipient receives assets later (from an inheritance or lawsuit settlement), this kind of trust can be created and funded to preserve the benefits at that time.

For the first party Special Needs Trust to be effective at preserving eligibility, the State has to be the first-named beneficiary upon death of the disabled beneficiary. This is called the “payback” clause.

On the other hand, someone else may decide to use their own assets to fund a Trust for a person with disabilities which can only be used for supplemental needs — to “supplement but not supplant government benefits to which the beneficiary is entitled.” They may have a child or grandchild who will need life-long care & support, and who relies on important benefits such as DDD, Section 8, SSI or Medicaid. This is a “third party trust,” and to avoid confusion is usually named a “Supplemental Benefits Trust.”  A parent may fund this kind of trust as part of their estate planning. It can be funded with transferred assets during their lifetime, or by the proceeds of life insurance after their death. Or it can be written into their Will and only established & funded at their death.

The Trustee handles both kinds of trusts in the same way, and the accounting responsibilities I wrote of yesterday are the same. The big difference is that in the third party trust, the State does not have to be listed as the first beneficiary upon the death of the disabled beneficiary (unless the person whose funds are being put in the Trust expects to apply for Medicaid within 5 years — in that case, they need to be mindful of the Medicaid transfer penalty that could apply to their own Medicaid application).

Call us for advice on navigating the minefield of special needs trusts and Medicaid and SSI …  732-382-6070

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