Michele Morgan, Vice President/Trust Officer
When you or a family member has a disability, protecting financial assets becomes a priority, especially when qualification for Medicaid and Supplemental Security Income (SSI) is involved. Fortunately, two types of special needs trusts (SNT) can help accomplish this.
Both trusts offer significant financial protection and can be used to pay for quality-of-life expenses, like wages for personal attendants and travel costs as well as for home furnishings, cars and even the therapeutic treatments not covered by Medicaid. The trusts differ in the degree to which these supplemental expenses are covered. This makes it essential to choose the right one for the job.
- First-Party-Funded SNTs are funded using the disabled person’s own financial assets.
- Third-Party-Funded SNTs are created using someone else’s money, not the disabled person’s assets.
While both types of trusts are exempt for Medicaid-qualification purposes, different rules apply to the way distributions can be made. This means the situations for their best use also differ.
First-Party-Funded SNT Rules
This type of trust is used when the disabled person’s own assets are sufficient to pay for the expenses Medicaid doesn’t cover. The disabled person, or someone acting on their behalf, creates the trust. That person is a parent, grandparent, legal guardian or the court. Funds typically come from a personal injury settlement, or inheritance that did not take a disability into account.
These trusts are irrevocable—once established, no changes are permitted. They must also include language that declares Medicaid has a lien on the trust’s assets. Any balances due to Medicaid for services received during the disabled person’s lifetime will need to be repaid to Medicaid before any other distributions may be made per the wishes of the disabled person’s estate.
Because Medicaid has this claim against the trust, all distributions during the trust owner’s lifetime are subject to review by Medicaid. The rules regarding those distributions are restrictive. For instance, a disabled person who wants to give a birthday gift to a sibling is prevented from doing so under this type of trust. The penalty for an errant disbursement can be severe. The disabled person is disqualified from Medicaid, becomes a private payer and needs to spend down the trust. Once that person’s assets reach $2,000 they may reapply for Medicaid.
Third-Party-Funded SNT Rules
This SNT is also exempt for Medicaid purposes because the money is not the disabled person’s and there is not a Medicaid lien. However, with no payback provision, the allowed distributions are less restrictive and determined by the grantor of the trust. Third-party trusts are typically funded with inheritances and bequests from family members who planned ahead and created the trust.
However, there are still rules. Chief among these is that the disabled person may not have any control whatsoever over the funds.
Hiring a Professional
Because the administration and investment of these trusts requires deep knowledge of the disbursement rules, typically either a corporate trustee or a combination of both a family member and a corporate trustee is chosen to oversee them. While naming only a family member is also possible, it puts undue pressure on that person. One false disbursement could strip a loved one of Medicaid coverage.
When hiring a corporate trustee, it’s important to find one who is willing to spend the time needed to understand and accommodate not just the rules but the needs and preferences of the disabled person.
If you, a friend or a family member might benefit from establishing an SNT—or from having a corporate trustee assume more responsibility for administering an existing SNT—we would be happy to talk to you about the options.
Call me at 630-844-3222. I am happy to help in any way I can.