Does a Supplemental Needs Trust have an Impact on Government Benefits?
Supplemental Needs Trusts allow disabled individuals to retain inheritances or gifts without eliminating or reducing government benefits, like Medicaid or Supplemental Security Income (SSI). There are cases where the individual is vulnerable to exploitation or unable to manage their own finances and using an SNT allows them to receive additional funds to pay for things not covered by their benefits.
Having an experienced estate planning attorney properly create the SNT is critical to preserving the individual’s benefits, according to a recent article titled “Protecting Government Benefits using Supplemental Needs Trusts” from Mondaq.
Disabled individuals who receive SSI must be careful, since the rules about assets from SSI are far more restrictive then if the person only received Medicaid or Social Security Disability and Medicaid.
The trustee of an SNT makes distributions to third parties like personal care items, transportation (including buying a car), entertainment, technology purchases, payment of rent and medical or therapeutic equipment. Payment of rent or even ownership of a home may be paid for by the trustee.
The SNT may not make cash distributions to the beneficiary. Payment for any items or services must be made directly to the service provider, retailers, or other entity, for benefit of the individual. Not following this rule could lead to the SNT becoming invalid.
SNTs may be funded using the disabled person’s own funds or by a third party for their benefit. If the SNT is funded using the person’s own funds, it is called a “Self-Settled SNT.” This is a useful tool if the disabled person inherits money, receives a court settlement or owned assets before becoming disabled.
If someone other than the disabled person funds the SNT, it’s known as a “Third-Party SNT.” These are most commonly created as part of an estate plan to protect a family member and ensure they have supplementary funds as needed and to preserve assets for other family members when the disabled individual dies.
The most important distinction between a Self-Settled SNT and a Third-Party SNT is a Self-Settled SNT must contain a provision to direct the trust to pay back the state’s Medicaid agency for any assistance provided. This is known as a “Payback Provision.”
The Third-Party SNT is not required to contain this provision and any assets remaining in the trust at the time of the disabled person’s death may be passed on to residual beneficiaries.
Even if the disabled person receives an inheritance directly, there is a risk that government benefits may be lost. But disabled persons are allowed to have their assets contributed to a “First-Party SNT”. With this type of SNT, the disabled person is allowed to be the beneficiary for life, but the government must be the remainder beneficiary after the death of the disabled person, up to the amount of the benefits the government expended for the disabled person. This is an imperfect solution, but it is often the only one available to disabled persons whose parents did not plan ahead with a good Third-Party SNT. Talk to an estate planning attorney to avoid this situation.
Many estate planning attorneys use a “standby” SNT as part of their planning, so their loved ones may be protected, in case an unexpected event occurs and a family member becomes disabled.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “Does a Supplemental Needs Trust have an Impact on Government Benefits?” read also these additional articles: What Games Keep My Mind Sharp as I Age? and What Is the Proposed IRS Anti-Clawback Provision? and Why Is Beneficiary Designation Important? and Does Diabetes Increase Chances of Suffering from Dementia?
References: Mondaq (May 27, 2022) “Protecting Government Benefits using Supplemental Needs Trusts”