Different Types of Special Needs Trusts

We’ve previously discussed what special needs trust are, and how they often can be beneficial for individuals who suffer from various disabilities. These individuals often have substantial medical expenses, and require very substantial help to pay for these expenses, unless they qualify for Medicaid benefits.  Medicaid can offer coverage for things such as home care aides, transportation to and from employment, assistance with prescriptions, not to mention hospitalization and physician’s bills.  Particularly for those who are more severely disabled, these expenses can often cost several thousands of dollars per month unless government aid is available.  The magic of a special needs trust is that it allows individuals with a disability to have some level of access to funds to help cover what public benefits programs, such as Medicaid, does not cover without losing eligibility for these programs.   This is important because as we’ve discussed previously, Medicaid and almost every other public benefits program has an asset test.  What this means is that if the individual is deemed to own property, particularly things like bank accounts or investment accounts, they simply will not qualify for any government aid till those funds are exhausted.

When using special needs trust, there are two major divisions for these trusts.  These can be broken down into first party special needs trust and third-party special needs trust.  This article will attempt to briefly summarize the differences between these two types of special needs trusts.

A first party special needs trust is an arrangement where an individual who was disabled is contributing money that otherwise would have been theirs.  This type of trust is typically used to hold either an inheritance or some type of proceeds from a lawsuit.  An example could be a settlement from a motor vehicle accident that left the individual permanently disabled.  This type of trust is specifically authorized under federal law, because the government acknowledged that oftentimes Medicaid does not provide complete coverage for an individual with a disability, but they still were concerned that these individuals should not be entitled to public benefits, and then also have the ability to leave a large inheritance to other family members.  This would then leave the state and federal government to spend hundreds of thousands of dollars on care, while other family members were reaping the benefit of the trust as opposed to just the individual disability.  The compromise came by allowing these trusts, but requiring that upon the death of the individual disability, any remaining funds in the trust be paid to the state where the individual received Medicaid benefits.  This repayment would either be the amount remaining in the trust, or the total amount of Medicaid benefits the individual received, whichever is less.  It is often necessary to have a court establish this type of trust, and it is very important to have a qualified elder law attorney involved in this process.

A third-party special needs trust is a slightly less complicated vehicle.  These types of trusts contain money which originally belonged to somebody else, such as a parent or other relative, who desired to leave funds to individual with a disability.  However, because of the asset test that is associated with Medicaid, it would be quite detrimental to the individual to leave this money to them outright.  Missouri, along with many other states, has a public policy that supports allowing other people to leave money for the benefit of an individual with a disability in special needs trusts.  Typically a key factor with this type of trust is to express clearly that the intention is to supplement and not to supplant public benefits.  When properly drafted this type of trust will enable the individual to retain eligibility for Medicaid benefits, and still have it be possible to use the funds to cover items that public benefits do not, such as dental care. This trust will last for the lifetime of the individual, and that upon the death of the individual with a disability, the assets can pass on to whomever the creator of the trust would desire.  Note that there is no requirement that the state be paid back with third-party special needs trust.  This makes proper planning for family members of disabled individuals all that much more important because the key to most third-party special needs trust that they need to be set up prior to the death person’s leading money for the benefit of the disabled individual.

In summary, both types of special needs trust have a very valid place in planning for individuals with disabilities.  A qualified elder law attorney will be able to determine which type of trust is most appropriate for an individual’s circumstances and help ensure an individual with a disability can be well taken care of for many years.