As an elder law attorney, I am
often asked by a parent of a disabled child “How can I
provide for my child’s financial needs when I am no
longer alive?” People are concerned that, by leaving an
inheritance directly to their disabled child, this will
usually disqualify the child from most means tested
public assistance programs. If the parents make an
outright gift to another sibling can they be assured
that this child will properly look after the disabled
child?
The solution to the problem is to
create a trust known as a “supplemental needs trust” for
the benefit of the disabled child. The purpose of the
trust is to preserve eligibility for public assistance
programs, such as Supplemental Security Income (SSI). In
most states, eligibility for SSI automatically creates
eligibility for Medicaid, which may be the only health
insurance the disabled child is able to receive. In
addition to maintaining public assistance eligibility,
assets held in the supplement needs trust may be used to
substantially improve the disabled child’s quality of
life by providing goods and services above those
provided by federal and state agencies.
There are two
main types of trusts. The third party "supplemental
needs trust" and the self-settled "special needs trust."
The third party supplemental needs trust is a trust
which is usually created with the assets of a parent or
grandparent for the benefit of the disabled child. The
trust may be created while the parent is alive or at
death through a testamentary trust under the parent’s
will or revocable trust. As long as the child cannot
revoke the trust or compel distributions, assets held in
the trust will not be considered an available resource
and will not disqualify the child from receiving public
assistance.
During the child’s lifetime,
depending on the laws of your particular state, the
trustees may be granted broad discretionary authority to
use trust assets to purchase goods and services not
otherwise available from governmental programs. These
may include supplemental medical, dental, diagnostic
work and treatment, nursing and attendant care, travel
and entertainment, supplemental housing, support and
transportation. In drafting the trust, the attorney will
have to take into consideration both federal and state
law. In some states the mere existence of the trustee’s
ability to use trust assets to provide food, clothing or
shelter will disqualify the child from receiving public
benefits. However, in other states direct payments to
third parties for food, clothing or shelter known as
"in-kind support and maintenance" will only cause a
reduction in the disabled child’s SSI for the month.
Upon the death
of the disabled child, assets held in the third party
supplemental needs trust may pass to other family
members and the trust is not required to reimburse the
state for public assistance furnished to the disabled
child under the state’s Medicaid program.
What happens
when a parent fails to create a supplemental needs
trust, during lifetime or at death, and the disabled
child receives their inheritance outright, or the child
receives funds as a result of a personal injury award?
Fortunately, all is not lost. Under the Omnibus
Reconciliation Act of 1993 ("OBRA ‘93") Congress
specifically authorized the transfer of assets to a
self-settled special needs trust, also known as a
"1396p(d)4(A) trust," as a means of preserving public
benefits. Under OBRA ‘93, the trust must be funded with
the assets of a disabled individual under 65 years of
age, by a parent, grandparent, legal guardian or the
court. As with the third party supplemental needs trust,
the trustee may be granted authority to provide benefits
over and above those provided by public or private
financial assistance.
The major
drawback to the self-settled special needs trust is
that, at the death of the beneficiary, the state will
have to be reimbursed for Medicaid benefits provided to
the disabled child prior to distribution of trust assets
to other family members.
In choosing a
trustee to administer the trust, the family should
consider the size of the trust assets, the financial
ability of the individual and the expected duration of
the trust. Where the assets of the trust are small the
appointment of a family member who has some investment
experience to serve as trustee may be the only practical
solution. However, where the assets of the trust are
substantial and the trust is anticipated to last for
twenty or thirty years, the appointment of a corporate
trustee to serve along with other family members is
preferable.
Whether the
trust is created as a third party trust or a
self-settled trust the advantages are many. The disabled
child is able to secure immediate eligibility for public
assistance such as SSI or Medicaid. While on Medicaid,
the child is able to obtain services at significantly
lower cost than the private pay rate. Some programs and
services are only available through the Medicaid
program. Even if the state Medicaid program has to be
reimbursed once the trust is terminated, the
availability of public assistance will permit the funds
held in the trust to go further in improving the child’s
quality of life.
The attorney who
drafts the supplemental needs trust must take into
consideration a broad range of both public and private
benefit programs, including Supplemental Security Income
(SSI) and Medicaid, as well as income, gift and estate
taxes issues. In addition to peace of mind, the greatest
flexibility is achieved when the trust is set up by a
parent or other third party either during lifetime or at
death, rather than passing the funds on to the disabled
child. As in many endeavors, the most successful outcome
is achieved by planning ahead.
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