When I met Mrs. Jones at her house, she seemed anxious. She has been worrying about how her daughter, Amy, for some time. Who will take care of Amy if something happens to her? In the meantime, she wants the best for her daughter and is very confused about what she can afford to do and what government benefits are available for Amy. I was glad to be there, especially with my tool box in hand!

As caring planners, we want to be prepared and to take advantage of all the available tools that can improve the quality of life of a client with special needs. Our objectives often include providing financial stability, maximizing government benefits, ensuring advance directives are in place and coordinating available resources in the community. This article will focus on one of the most powerful tools at our disposal – Special Needs Trusts.

Trusts can be a wonderful vehicle for asset management, creditor protection and maximizing government benefits for the lifetime of a loved one with special needs. Special needs most often last a lifetime, and may require specialized care beyond that available from a family care giver. Such care may require the services of physicians, hospitals, and even long-term care in a nursing home. In some cases, structured living, such as in a group home, may be the most appropriate setting.

We need to be clear about the different types of trusts that are in our tool box, just as carpenters can select among various saws to cut wood. We also need to be mindful of where we live. State laws can affect what works and does not work. The carpenter will use different materials in a bathroom versus a bedroom.

Third-Party Supplemental Needs Trusts

Mrs. Jones can set up this trust under a Will and name Amy’s sister as the Trustee. Alternatively, Mrs. Jones can set up a Supplemental Needs Trust immediately that can be funded now or in the future, by Mrs. Jones or other family members. The funds in the Trust can be used to supplement Amy’s government benefits to pay for her living expenses and to enhance her quality of life. Amy can continue to receive monthly payments from SSI to help with living expenses and Medicaid to pay for her medical needs.

Care givers are often troubled over how to leave money for a person with special needs without interfering with eligibility for Medicaid or Supplemental Security Income (SSI). An outright gift or bequest to a person with special needs will affect his or her ongoing eligibility for such programs, which are necessary for the person’s maintenance and health care needs. The solution is a Third-Party Supplemental Needs Trust (sometimes referred to as a Third-Party Special Needs Trust)

First-Party Special Needs Trusts

Amy had received a $50,000 inheritance from a well-intentioned uncle who unexpectedly passed away. Mrs. Jones met with a special needs attorney to obtain guardianship so she could manage the money for Amy. Mrs. Jones can now set up Special Needs Trust for Amy with the $50,000 and she can be the Trustee. The funding of the Trust will prevent Amy from losing SSI and Medicaid." Like the Third-Party Supplemental Needs Trust, the funds in this Trust can be used to supplement her government benefits to pay for her living expenses and to enhance her quality of life. Upon Amy’s demise, any money remaining in the Trust must first be used to reimburse the State for the amount of Medicaid provided to Amy during her lifetime.

In the event that the person with special needs has his or her own assets, planning must be done to access government benefits. The person with special needs may have assets from (i) a lawsuit based on negligence or medical malpractice, (ii) an inheritance, or (iii) his or her own labors prior to becoming disabled. In order to access government benefits, the individual can transfer his or her assets into a Special Needs Trust, sometimes referred to a (d)(4)(A) Trust or a Pay Back Trust. Upon the individual’s demise, the State has the right to be reimbursed for the Medicaid paid to the individual to the extent of the assets in the Trust at that time.

Why Establish a Supplemental Needs Trust or Special Needs Trust?

Mrs. Jones wants to make sure that Amy will be eligible for Medicaid and SSI for life. You have the answer in your tool kit – the Third-Party Supplemental Needs Trust for Mrs. Jones assets and a First-Party Special Needs Trust for Amy’s assets.

To preserve eligibility for Medicaid. Medicaid, a joint federal-state program, provides medical assistance to those who are disabled and can demonstrate financial need. Children and adults can qualify for Medicaid only if their monthly income and the value of their other assets fall below certain limits, which vary from state to state.

In determining eligibility for Medicaid, a state may count only the income and assets that are legally available to the applicant. A Supplemental or Special Needs Trust restricts the beneficiary’s own direct access to the assets in the trust to such an extent that the assets are not considered legally available to the beneficiary. Thus, a Supplemental or Special Needs trust can protect Medicaid eligibility because assets in the trust are uncountable.

Such trusts can be especially useful to supplement what Medicaid covers or to fill the gaps not covered by Medicaid. Although Medicaid pays for a number of medical costs, including hospital bills, physician services, and long-term care, it will not subsidize items and services considered nonessential. These may include health-related expenses like eyeglasses, dental care, rehabilitation services, and home health aide services, as well as personal expenses such as transportation, computer equipment, and vacations.

To preserve eligibility for Supplemental Security Income (SSI). Supplemental Security Income is a monthly income benefit that children and adults with special needs who have limited income and resources can receive. These cash benefits can be used for basic needs such as housing and food. SSI benefits are needs-based, so having too many assets or too high an income can affect eligibility or how much one is entitled to receive monthly. Naming a Third-Party Supplemental Needs Trust, instead of a child, as the beneficiary of your assets allows those assets to be devoted to the care of a loved one.

To provide financial management. The Trust approach can be a helpful tool to ensure that a financial plan is implemented for all of the assets that are available to the person with special needs. Sound financial management can make the difference by extending the assets and income over the lifetime of the person. Life Insurance is another tool that can also be helpful in creating a fund of assets in the event a parent predeceases a child with special needs.

Mrs. Jones said goodbye to me at the front door of her home. She smiled and thanked me. For the first time in a long time, she saw some daylight in her daughter’s future, and hers as well. I felt the rays of the sun upon me and it felt good.

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Vincent J Russo, J.D., LL.M., CELA is the Managing Shareholder of the law firm of Vincent J. Russo & Associates, P.C. of Westbury, Lido Beach, Woodbury and Islandia, New York. Vincent is a co-founder of the Academy of Special Needs Planners (www.specialeneedsplanners.com) and co-founder of the Theresa Alessandra Russo Foundation which enhances the lives of children with special needs (www.theresafoundation.org). He is a national advocate for the rights of people with special needs and of seniors.